Accounting Relationship Involving Inventory

The principle involved is simply that the cost of inputs is to be "balanced against the cost of output. In what follows, the monetary  value attached is what is meant even if not explicit so stated. 

In the case of raw materials : 

Opening inventory of raw materials + cost of purchases 

= cost of materials consumed + closing inventory of materials. 

In this, cost of materials consumed can be calculated by means of appropriate chosen method for pricing issues (vide FIFO, LIFO, etc. in further pages). Then, the value of the closing inventory of raw materials is simply the balancing figure. 

In the case of works-in-progress 

Opening works-in-progress + cost incurred during the year 

= cost of goods produced + closing works-in-progress. 

Here, if the cost of goods produced can be calculated by means of cost accounts, the balancing figure is the value of incomplete items in closing works-in-progress. 

In the case of finished goods : 

Opening inventory of finished goods + cost of goods produced 

= production cost of goods sold + closing inventory of finished goods. 

Here, the method of pricing the completed goods (in closing inventory) (or finished goods stock) will determine the cost of goods sold, whereby profits earned can further be calculated. 

In all the three cases, closing inventory is always best checked by physical stock-taking. 

The above-noted relationships could be rather rigorously evaluated if a full-fledged costing system, or priced-stock ledgers are duly maintained in the organisation. Otherwise, it becomes more obligatory to exhaustively evaluated the closing inventory (raw materials, works-in-progress, and finished goods) through detailed physical counting and market corroboration for assistance.