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CHAPTER 3
ACCOUNTING FOR INVENTORY

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OBJECTIVES
1. Explain the basic concepts and principles of
inventory and present inventory information
on the financial statements.
2. Journalise inventory-related transactions on
the accounting account system.
3. The meaning of information through financial
ratios.

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CONTENTS
Product benefits
➢ Conceptualizing, recording and
evaluating inventory.
➢ Apply the accounting system to
record and process transactions
related to inventory.
➢ Present inventory information on the
• Increased productivity
• Seamless integration financial statements.
• Enhanced user experience ➢ Financial ratios.
• Scalability for future growth
• User-friendly learning

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SECTION 1:
Conceptualizing,
recognizing and
costing
inventory
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DEFINITION
Inventory is :
➢ To be kept for sale during normal
production and business periods;
➢ In the process of unfinished production
and business; or
➢ Raw materials, materials, tools and
instruments for use in the process of
production, business or provision of
services.

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Periodic and perpetual inventory system

Periodic
COGS = Opening Balance +
inventory
Purchase – Closing Balance
system

Perpetual Closing Balance = Opening

inventory Balance + Purchase - Sale
system
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Periodic and perpetual inventory system

❖ Periodic inventory system: Inventory is accounted for at the end of

the period
❖ Perpetual inventory system: Each purchase/instock and sale of
goods/outstock is recorded in an Inventory Account.
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Recognition of inventory
➢ Inventory is the property of a business, so an important
basis for recognizing inventory is ownership of inventory
(including benefits and risks).
➢ To determine the time of transfer of ownership, it is
necessary to base on the terms of delivery agreed
between the two parties and the time when the benefits
and risks are transferred.
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Exercise 1
There are some of the following situations about
inventory at Thien Hung Company at the time of
31.12.20X0:
• The enterprise bought a shipment worth 200 million
VND, which was received at its warehouse on
05.01.20x1. The invoice is dated 29.12.20x0, and the
goods were sent on 01.01.20x1
• The enterprise bought some goods worth 120 million
VND received on 28.12.20x0 but has not received the
invoice. The invoice is on 5.01.20x1

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Costing inventory
Inventory is calculated at the original price at
the time of recognition:
• In case of purchase outside
• In case of production and processing

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 In case of purchase outside *
The original price of inventory is calculated
according to the cost of purchase, including:
➢ Purchase price;
➢ Non-refundable taxes,
➢ Expenses for transportation, loading and
unloading, preservation during the purchase
process and other expenses directly related
to the purchase of inventory;
➢ Trade discounts and discounts due to
improper specifications and quality of
purchased goods shall be deducted from the
purchase cost.

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Exercise 1
• Enterprises buy goods, and the price before
VAT is 50 million VND, VAT is 10%, and
unpaid. The cost of transportation, loading and
unloading is 3 million VND. The trade discount
is 1 million VND
• Enterprises import a batch of goods. The
import price is 200 million VND, VAT is 10%,
and import tax is 5%. The cost of
transportation, loading, and unloading is 5
million VND.

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1. On April 10, 20X5, ABC Company purchased 500 units of raw materials from a supplier at a unit
price of 200.000 dong on credit. The supplier offered a 5% trade discount.
2. An enterprise purchases goods domestically, but has not been paid yet. The list price before
VAT is 80 million VND (VAT is 10%). The enterprise receives a trade discount of 2 million VND.
Additional costs incurred: Transportation, loading, and unloading fees of 4 million VND (already
paid).
3. Imported goods for a CIF price of $20.000. The import tax rate is 30%, the excise tax rate is
50%, and the VAT rate is 10%. The exchange rate is 26.000 VND/USD.

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In case of production and processing

Production cost

Direct raw Direct labour Production

material costs costs overheads

The cost of The

The opening The closing The
Finished production
= of Work in + - of Work in - value of
goods cost during
progress progress 14 scrap
the period
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Exercise 2
For an enterprise that only produces one type of product in the period, there is the following information:
The opening of Work in progress: 2.000.000
During the period, there are the following transactions:
➢ Outstock of raw materials for direct production of 8,000,000 VND, production management: 500.000
VND.
➢ Salary calculation of production department: (a) Direct production: 6.000.000 (b) Production manager:
1.000.000
➢ Outstock of raw materials for direct production of 5.000.000 VND, production management: 300.000
VND.
➢ Depreciation of machinery at the production department: 1.000.000.
➢ Electricity and water bills for production with a price of 2.000.000 VND, 10% VAT, unpaid.
➢ Scrap recovered in warehouse value: 500.000 VND.
➢ Enterprises entering the finished goods: 20.000 units. The closing of Work in progress at the end of
the period is 3.500.000
Requirement: Calculate the original price of finished products in stock
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For an enterprise that produces only one type of product in the period, the following information is provided:
•Opening balance of Work in progress (WIP): 3.000.000 VND.
During the period, the following transactions occurred:
•Outstock of raw materials:
• Direct production: 10.000.000 VND
• Production management: 600.000 VND
•Salary calculation of production department:
• Direct production workers: 7.500.000 VND
• Production managers: 1.200.000 VND
•Outstock of additional raw materials:
• Direct production: 6.000.000 VND
• Production management: 400.000 VND
•Depreciation of machinery and equipment at the production department: 1.200.000 VND
•Electricity and water bills for production: 2.500.000 VND (VAT 10%, unpaid)
•Scrap recovered and returned to warehouse: 600.000 VND
•Enterprise transferred finished goods to warehouse: 25.000 units
•Closing balance of Work in progress (WIP) at end of period: 4.500.000 VND
Requirement: Calculate the cost of finished goods transferred to warehouse.

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 Inventory cost flow assumptions *

• First-In, First-Out (FIFO)

• Weighted Average Cost (WAC)
• Specific Identification

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Exercise 2
Date Units Cost per Unit

1st Jan Beginning Bal 300 100.000

2nd Jan Sale 200

14th Jan Purchase 900 120.000

25th Jan Sale 500

28th Jan Sale 300

30th Jan Purchase 400 110.000

Ending Inventory?
Quantity = Units
Value = VND

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 Inventory cost flow assumptions *
Unit price: 1000 VND
First-In, First-Out (FIFO)
Input Output Ending
Date Cost per Cost per Cost per
Units Total Units Total Units Total
Unit Unit Unit

1st Jan Beginning Bal 300 100 30.000

2nd Jan Sale 200
14th Jan Purchase 900 120 108.000

25th Jan Sale 500

28th Jan Sale 300

30th Jan Purchase 400 110 44.000

Ending Inventory?
Quantity = Units
Value = VND
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 Inventory cost flow assumptions *
Unit price: 1000 VND
Weighted Average Cost
Input Output Ending
Date Cost per Cost per Cost per
Units Total Units Total Units Total
Unit Unit Unit

1st Jan Beginning Bal 300 100 30.000

2nd Jan Sale 200
14th Jan Purchase 900 120 108.000
25th Jan Sale 500
28th Jan Sale 300

30th Jan Purchase 400 110 44.000

31st Jan Ending Bal

Ending Inventory?
Quantity = Units
Value = VND
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 Allowance for Inventory Devaluation *
• Allowance for inventory devaluation is an accounting
adjustment made when the market value of inventory
falls below its recorded cost. This ensures that financial
statements reflect the lower of cost or net realizable
value (NRV), following the conservatism principle in
accounting.
• Businesses must recognize a provision for inventory
devaluation if the net realizable value (NRV) of
inventory is lower than its recorded cost. NRV is
determined as:
• NRV=Estimated Selling Price−Expected Costs to Sell

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The provision is calculated as:

Provision Amount=Book Value−Net Realizable Value (NRV)

For example, if a business has 1,000 units of a product costing 50,000 VND per unit,
but the market price drops to 40,000 VND per unit, the provision is:

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Section 2:
Journalise inventory-related transactions
on the accounting system
 Accounting for Raw materials *
Account 152
Debit Credit
▪ Actual cost of raw materials purchased, hand-made ▪ Actual cost of raw materials sold for
processed, outsourced, processed, received as production, business, sale, outsourcing, or
contribution or received from other sources; contribution as capital;
▪ Cost of raw materials returned to sellers or
▪ Cost of raw materials excess detected when
sales rebates
conducting physical inventory count. ▪ Trade discount on raw materials purchased;
▪ Cost of raw materials detected lost when
conducting physical inventory count;

Debit balance
Actual cost of ending raw materials inventory.

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 Method of accounting for several major transactions *

Account 152

111, 112, 111, 112,

141, 331... 141, 331...

133
133

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 Method of accounting for several major transactions *
(1) When buying raw materials to add to inventory, according to invoices, warehouse receipt and
relevant documents recording received raw materials cost
Dr 152 – Raw materials (cost without VAT)
Dr 1331 – Deductible VAT
Cr 111, 112, 141, 331, etc. (total payment)
Example: The company buys raw materials A at a price exclusive of VAT 100 million on credit. (VAT 10%)
Dr 152 100 million
Dr 1331 10 million
Cr 331 110 million
(2) In case the trade discount or sales discount is discounted after buying raw materials
Dr 111, 112, 331, etc.
Cr 152 – Raw materials
Cr 1331 – Deductible VAT
Example: The company received a 10% trade discount for the above transaction.
Dr 331 11 million
Cr 152 10 million
Cr 1331 1 million

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 Method of accounting for several major transactions *

Account 152

331 CIF price

Excise tax
3332

Import tax
3333

3338 Environmental tax

111, 112, 331,…

33312 133

VAT at the import stage

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(3) When importing raw materials, the following accounts shall be recorded:
Dr 152 – Raw materials
Cr 331 – Account payables
Cr 3333 – Import tax
Cr 3332 – Excise tax (if any).
Dr 133 – Deductible VAT
Cr 33312 – Deductible VAT
Example: Import raw materials A at a CIF price of $20,000 on credit. The import tax rate is 20%, the excise tax
is 25%, and the VAT rate is 10%. The exchange rate is 24.000 VND/USD
Dr 152 720,000,000
Cr 331 480,000,000
Cr 3333 96,000,000
Cr 3332 144,000,000
Dr 133 72,000,000
Cr 33312 72,000,000
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Method of accounting for several major transactions *

Account 152

621

627, 642,
641

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(4) For the direct dispatch of raw materials for production:
Dr 621 - Direct costs of raw materials
Cr 152 - Raw materials inventory
(5) For sending raw materials to the sales/administration department:
Dr 641/642
Cr 152 - Raw materials inventory
For instance, the company sends raw materials worth 20 million VND for production
and 10 million VND to the sales department.
Dr 621 20 million
Dr 641 10 million
Cr 152 30 million

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 *
Which of the following expenses should NOT be included in the cost of raw materials (account 152)?
A. Import duty
B. Deductible VAT
C. Transportation cost to warehouse
D. Loading and unloading charges
After purchasing raw materials, the company receives a trade discount applied after purchase. Which is
the correct accounting treatment?
A. Increase 152 (Raw materials)
B. Decrease 152 (Raw materials)
When a company sends raw materials to the production department, for direct production, it should:
A. Dr 627 – Production Overheads / Cr 152
B. Dr 621 – Direct Costs / Cr 152
C. Dr 622 – Indirect Costs / Cr 152
D. Dr 811 – Other expenses / Cr 152
For imported materials, after recording the cost into 152, the deductible VAT on imports is recorded:
A. Dr 133 – Deductible VAT / Cr 331 – Account payable
B. Dr 152 – Raw materials / Cr 133 – Deductible VAT
C. Dr 133 – Deductible VAT / Cr 33312 – Deductible VAT
D. Dr 152 – Raw materials / Cr 331 – Account payable 33
 Accounting for Tools and Supplies *
Account 153
Debit Credit
▪ Actual cost of received tools and supplies purchase, ▪ Actual cost of dispatched tools and supplies
handmade, outsourced, or contributed as capital; for business, lease or contribution as capital;
▪ Cost of received tools and supplies for lease; ▪ Trade discounts on tools and supplies
purchased;
▪ Actual cost of tools and supplies in excess detected
▪ Cost of tools and supplies returned to sellers
when conducting physical inventory count; or tools and supplies eligible for discounts;
▪ Cost of tools and supplies in deficiency
detected when conducting physical inventory
count;

Debit balance
Actual cost of tools and supplies inventory

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 Method of accounting for several major transactions *

Account 153

111, 112,
141, 331...

133

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Method of accounting for several major transactions *
Account 153

Allocate expenses 627, 641,642

(use one time)

242
use for Allocate 627,
more than expense 641,642
one time (use for
more than
one time)

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 Method of accounting for several major transactions *
(1) When buying tools and supplies to add to stock
Dr 153 – Tools and supplies (VAT-exclusive prices)
Dr 1331 – Deductible VAT (input VAT)
Cr 111, 112, 141, 331, etc. (total payment)
(2) When buying tools and supplies to use immediately
+ Using tools and supplies for equal or more than 2 months
Dr 242 - Tools and supplies (VAT-exclusive prices)
Dr 1331 – Deductible VAT (input VAT)
Cr 111, 112, 141, 331, etc. (total payment)
At the end of the month, allocating prepaid expenses
Dr 642/641/627
Cr 242
+ Using tools and supplies for one month
Dr 642/641/627 (VAT-exclusive prices)
Dr 1331 – Deductible VAT (input VAT)
Cr 111, 112, 141, 331, etc. (total payment)

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Examples:
1. Buy 10 units of tools at the purchase price excluding VAT of 10 million VND/unit, paid by bank
deposit. The VAT rate is 10%. The purchased tools have been stocked in the warehouse.
Dr 153 100 million
Dr 1331 10 million
Cr 112 110 million
2. Buy one tool at the purchase price before VAT of 5 million VND to use immediately in the
production department, paid in cash. The VAT rate is 10%. (This tool is for single use)
Dr 627 5 million
Dr 1331 0,5 million
Cr 111 5,5 million
3. Buy one tool at the purchase price before VAT of 15 million VND to use immediately in the
production department, paid in cash. The VAT rate is 10%. (This tool is designed for five uses)
Dr 242 15 million
Dr 1331 1,5 million
Cr 111 16,5 million
Dr 627 3 million
Cr 242 3 million

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When an enterprise buys tools and supplies to add to inventory, which account should be debited?
A. 153 – Tools and supplies
B. 242 – Prepaid expenses
C. 627 – Production overheads
D. 641 – Selling expenses

When buying tools and supplies to use immediately (for more than 2 months), what is the correct accounting
treatment?
A. Debit 153 and credit 111/112/331
B. Debit 242 and credit 111/112/331
C. Debit 627 and credit 111/112/331
D. Debit 1331 and credit 642

At the end of the month, when allocating prepaid expenses related to tools and supplies, which accounts are
involved?
A. Dr 153 / Cr 242
B. Dr 642/641/627 / Cr 242
C. Dr 242 / Cr 642/641/627
D. Dr 111 / Cr 153

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 Accounting for Work in progress *
Account 154
Debit Credit
▪ Direct raw materials costs, direct labor costs, costs of ▪ Value of raw materials, materials, goods
construction machinery, factory overheads incurred in which are completely processed and
an accounting period which is related to manufacture returned to warehouse;
▪ Actual costs of manufactured products which
of products and costs of services rendered.
are stocked transferred for sale, internal use
or immediate use in capital investment;

Debit balance
Ending work in progress.

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 Method of accounting for several major transactions *
Account 154
xxxx

TK 621 (1) (4) TK 155

(2)
TK 622

TK 627 (3)

xxx

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 Method of accounting for several major transactions *
(1) At the end of the period, when transferring direct raw material expenses according to every
expense object
Dr 154 – Work in progress
Cr 621 – Direct raw materials
(2) At the end of the period, when transferring direct labor costs according to every expense object
Dr 154 – Work in progress
Cr 622 – Direct labor costs
(3) At the end of the period, when transferring production overheads according to every expense
object
Dr 154 – Work in progress
Cr 627 – production overheads
(4) When delivering goods to inventory during a period, the prime costs of goods shall be recorded
as follows:
Dr 155 – Finished goods
Cr 154 – Work in progress

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Examples:
At a company that produces only one type of product, the following information is available for the
period:
Beginning balance of Account 154 (Work in Progress - WIP): 2.000.000
During the period, the following transactions occurred:
1. Issued raw materials for direct production: 8.000.000; for production management: 500.000.
2. Calculated wages for the production department:
(a) Direct production workers: 6.000.000
(b) Production management staff: 1.000.000
3. Issued additional raw materials for direct production: 5.000.000; for production management:
300.000.
4. Depreciation of machinery and equipment in the production department: 1.000.000.
5. Electricity and water bill for production (excluding VAT): 2.000.000, VAT at 10%, unpaid.
6. Recovered scrap materials entered into inventory: 500.000.
7. The company transferred completed products to inventory: 20.000 units.
Ending work-in-progress (WIP) cost: 3.500.000.
Requirements:
[Link] journal entries for the economic transactions.
[Link] the total production cost and the unit cost.
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 Accounting for Finished goods *
Account 155
Debit Credit
▪ Cost of inventoried finished goods; ▪ Actual cost of dispatched finished goods;
▪ Cost of finished goods in surplus under physical ▪ Cost of finished goods in shortage under
inventory count; physical inventory count;

Debit balance
Actual cost of ending finished goods inventory.

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Account 155

TK 154 (1) (2) 632

(3) 157

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 Method of accounting for several major transactions *
(1) When receiving finished goods manufactured by the enterprise or under outsourcing agreement,
the following accounts shall be recorded:
Dr 155 – Finished goods
Cr 154 - Work in progress
(2) When dispatching finished goods for sale to customers, the costs of finished goods sold shall be
recorded as follows:
Dr 632 – Costs of goods sold
Cr 155 – Finished goods
(3) When dispatching finished goods for sale or agencies, the following accounts shall be recorded:
Dr 157 – Consignment goods (through agencies)
Cr 155 – Finished goods

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 Accounting for Allowances for inventories *
Account 2294
Debit Credit
▪ Reverting negative difference between the allowance ▪ Creating allowances for declining inventory at
of this period and the unused allowance of previous the time in which the financial statement is
period; prepared.

Credit balance
Ending allowance for declining inventory

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 Method of accounting for several major transactions *
(1) When preparing a financial statement, if the allowance for a decline in inventories created
in this period is greater than the allowance created in the previous period, the difference
between them shall be additionally created, and the following accounts shall be recorded:
Dr 632 – Costs of goods sold
Cr 2294 – Allowances for inventories
(2) When preparing a financial statement, if the allowance for a decline in inventories created
in this period is smaller than the allowance created in the previous period, the difference
between them shall be converted, and the following accounts shall be recorded:
Dr 2294 – Allowances for inventories
Cr 632 – Costs of goods sold.

48
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Examples:
A company has 1.000 units of Product X in stock, purchased at VND 200.000 per unit. However, due to a
decrease in market demand, the product’s net realizable value has dropped to VND 180.000 per unit.
Provision per unit = 200.000 − 180.000 = 20.000 VND
Total provision = 20.000 × 1.000 = 20.000.000 VND
Journalise the entry for:
Case 1: The beginning allowance for inventories is 10 million. The amount of allowance for inventories in
this period is greater than the beginning allowance for inventories (20 mil > 10 mil)
Dr 632 10 million
Cr 2294 10 million
Case 2: The beginning allowance for inventories is 25 million. The amount of allowance for inventories in
this period is smaller than the beginning allowance for inventories (20 mil < 25 mil)
Dr 2294 5 million
Cr 632 5 million
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Section 3:
Present inventory information on the
financial statements
 *
Inventory is classified as a current asset and reported under Account 152, 153, 155, 156, and 157,
depending on the type of inventory. The balance sheet typically presents inventory as follows:
Current Assets Section including:
- Goods in transit (Account 151)
- Raw Materials (Account 152)
- Tools and Supplies (Account 153)
- Work-in-Progress (Account 154)
- Finished Goods (Account 155)
- Merchandise Goods (Account 156)
- Outward goods on consignment (Account 157)
- Less: Allowances for inventories (Account 2294)

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Section 4: Financial ratios

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Meaning:
•Measures how efficiently a company sells and replaces its inventory.
•A high ratio suggests strong sales and efficient inventory management.
•A low ratio may indicate excess stock, slow-moving goods, or weak sales.

Days Sales of Inventory (DSI)

•Measures how many days inventory remains before being sold.
•A low DSI indicates fast inventory movement.
•A high DSI suggests slow-moving inventory, which may lead to obsolescence.

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THE END

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