This Inventory Accounting Guide assumes use of the Perpetual Inventory accounting. If you use Periodic inventory accounting, please contact BF-Controller-Accounting@osu.edu for assistance.
Below is a reference guide on the accounting entries used to track inventory, and the Workday Business Processes that originate the accounting entries. These are the entries from the perspective of the Earnings Operation, and specific to inventory that is not managed within Workday (Third-Party system or external process).
Table of Contents
- Inventory is Purchased
- Inventory is Sold
- Inventory Quantity/Value needs to be Increased
- Inventory Quantity/Value needs to be Decreased
- Inventory Average Cost
Inventory is Purchased:
Inventory should be purchased using a Requisition, or in some instances a PCard/Expense Report. To ensure that the accounting entries correctly post to the Balance Sheet, all inventory related procurement lines must include the following:
- Approved Worktags for the Earnings Operation (Cost Center, Balancing Unit, Fund)
- Expenditure Treatment: ET131
Requisition/Purchase Order:
| Ledger Account | Debit | Credit | Originating Business Process |
|---|---|---|---|
| 15000: Inventory | X | Supplier Invoice | |
| 20XXX: Accounts Payable | X | Supplier Invoice |
Expense Report:
| Ledger Account | Debit | Credit | Originating Business Process |
|---|---|---|---|
| 15000: Inventory | X | Expense Report | |
| 66295: PCard Clearing | X | Expense Report |
Cost Center Journal/Accounting Adjustment*
In most cases, a Cost Center Journal/Accounting Adjustment is not needed. However, if the original transaction inadvertently did not include ET131 and the approved Earnings Fund, then a correcting entry would be needed. For correcting entries the Expense account should match original transaction being offset.
| Ledger Account | Debit | Credit | Originating Business Process |
|---|---|---|---|
| 15000: Inventory | X | Cost Center Journal/Accounting Adjustment | |
| 6XXXX: Expense | X | Cost Center Journal/Accounting Adjustment |
Inventory is Sold:
When inventory is sold, manual Cost Center Journals must be completed to reduce your Inventory Ledger Account (15000) and record the expense for the purchase of the inventory items as cost of sales. In most cases, you would record the expense to the Cost of Sale Ledger Account (61020), along with the appropriate Spend Category for what was sold.
To ensure that your are reducing your inventory ledger by the correct amount, be sure you reduce based on the current average cost for the items sold.
| Ledger Account | Debit | Credit | Originating Business Process |
|---|---|---|---|
| 61020: Cost of Sales | X | Cost Center Journal (Include ET101, approved Earnings Fund, and Spend Category for what was sold) | |
| 15000: Inventory | X | Cost Center Journal (Include ET101, approved Earnings Fund, and Spend Category for what was sold) |
*In most cases inventory should be classified as “Cost of Sale” when it is sold to ensure proper overhead rate application.
Inventory Quantity/Value needs to be Increased:
When adjusting Inventory, the following Spend Categories are used and map to ledger account 61020 Cost of Sales.
- SC10744: Inventory Shrinkage – Used to reduce or increase the value of inventory when your on hand quantity is lower or higher than the expected amount. This could be due to loss, theft, or clerical error.
- SC11039: Inventory Obsolete – Used to fully reduce the value of inventory due to obsolescence.
- SC11041: Inventory Spoilage – Used to fully reduce the value of inventory for reasons other than obsolescence, such as damage or destruction.
- SC11040: Inventory Cost Adjustment – Used to reduce or increase inventory due to changes in average cost, or other value adjustments (i.e. manually increasing inventory that was not marked with ET131).
| Ledger Account | Debit | Credit | Originating Business Process |
|---|---|---|---|
| 15XXX: Inventory | X | Cost Center Journal | |
| 61021: Cost of Sales | X | Cost Center Journal |
Inventory Quantity/Value needs to be Decreased:
When adjusting Inventory, the following Spend Categories are used and map to ledger account 61020 Cost of Sales.
- SC10744: Inventory Shrinkage – Used to reduce or increase the value of inventory when your on hand quantity is lower or higher than the expected amount. This could be due to loss, theft, or clerical error.
- SC11039: Inventory Obsolete – Used to fully reduce the value of inventory due to obsolescence.
- SC11041: Inventory Spoilage – Used to fully reduce the value of inventory for reasons other than obsolescence, such as damage or destruction.
- SC11040: Inventory Cost Adjustment – Used to reduce or increase inventory due to changes in average cost, or other value adjustments (i.e. manually increasing inventory that was not marked with ET131).
| Ledger Account | Debit | Credit | Originating Business Process |
|---|---|---|---|
| 61021: Cost of Sales | X | Cost Center Journal | |
| 15XXX: Inventory | X | Cost Center Journal |
Inventory Average Cost:
At Ohio State, inventory is valued using the Average Cost method unless otherwise approved. Other inventory valuation methods, such as specific identification or fist-in-first-out (FIFO) may also be appropriate, depending on the circumstances. Please contact the Controller’s Office for additional guidance on inventory accounting for your unit.
The average cost method is a way to value inventory by calculating the cost of goods available for sale and dividing it by the total number of units available for sale. This calculation should be done for you by your third party inventory management software, however below is a brief example to explain how it is done.
Let's say you have the following purchases of widgets:
- Purchase 1: 100 widgets at $5 each = $500
- Purchase 2: 200 widgets at $6 each = $1,200
- Purchase 3: 150 widgets at $7 each = $1,050
Total cost of goods available for sale: $500 + $1,200 + $1,050 = $2,750
Total number of units available for sale: 100 + 200 + 150 = 450
Average cost per unit: $2,750/450=$6.11
So, the average cost per widget is approximately $6.11.
The important thing to keep in mind is that only units available for sale (i.e. still held in inventory) are included in the calculation. Once all the widgets from purchase 1 have been sold, they would no longer be included in the calculation.