Ordering and issuing inventory

This page looks at some of the practicalities of ordering and issuing inventory with an emphasis on some of the procedures and forms used.

Accounting procedures for ordering and issuing inventory

Accounting and control procedures for ordering and issuing inventory include the following functions:

• ordering
• purchasing
• receiving
• issuing
• storing and stocktaking.

Ordering, purchasing and receiving inventory

The procedures for ordering, purchasing and receiving materials are as follows.

 When a department requires new materials, a purchase requisition is completed (including authorisation by the relevant manager) and sent to the purchasing department.

• On receipt of a properly authorised requisition, the purchasing department will select a supplier and create an order on a purchase order form.
• The purchase order form is sent to the supplier and copies are also sent to the accounts department and the goods receiving department.
• On receipt of the goods, the goods receiving department will check the goods against the relevant purchase order, and check the delivery note which accompanies the goods. Full details of the goods are then entered onto a goods received note (GRN).
• A copy of the GRN is attached to the relevant purchase order and they are both sent to the purchasing department where they are matched to the relevant supplier's purchase invoice. Once approved, the purchase invoice can be paid.

Issuing inventory

The accounting procedures for issuing inventory are as follows.

• Materials requisition notes are issued to production departments. Their purpose is to authorise the storekeeper to release the goods which have been requisitioned and to update the stores records.
• Materials returned notes are used to record any unused materials which are returned to stores. They are also used to update the stores records.
• Materials transfer notes document the transfer of materials from one production department to another. They are also used to update the stores records.

Some specimen documents that are used in the ordering, receiving and issuing of inventory .

Accounting for inventory - the material inventory account

Materials held in store are an asset and are recorded in the balance sheet of a company.

Accounting transactions relating to materials are recorded in the material inventory account.

Physical inventory and book inventory

Perpetual inventory

Perpetual inventory is the recording as they occur of receipts,issues and the resulting balances of individual items of inventory in either quantity or quantity and value.

• Inventory records are updated using stores ledger cards and bin cards.
• Bin cards also show a record of receipts, issues and balances of the quantity of an item of inventory handled by stores.
• As with the stores ledger card, bin cards will show materials received (from purchases and returns) and issued (from requisitions).
• A typical stores ledger card is shown below.

Stocktaking

The process of stocktaking involves checking the physical quantity of inventory held on a certain date and then checking this balance against the balances on the stores ledger (record) cards or bin cards. Stocktaking can be carried out on a periodic basis or a continuous basis.

• Periodic stocktaking involves checking the balance of every item of inventory on the same date, usually at the end of an accounting period.
• Continuous stocktaking involves counting and valuing selected items of inventory on a rotating basis. Specialist teams count and check certain items of inventory on each day. Each item is checked at least once a year with valuable items being checked more frequently.
• Any differences (or discrepancies) which arise between 'book' inventory and physical inventory must be investigated.
• In theory any differences, as recorded in the stores ledger or the bin card, must have arisen through faulty recording.
• Once the discrepancy has been identified, the stores ledger card is adjusted in order that it reflects the true physical inventory count.
• Any items which are identified as being slow-moving or obsolete should be brought to the attention of management as soon as possible.
• Management will then decide whether these items should be disposed of and written off to the income statement.
• Slow-moving items are those inventory items which take a long time to be used up.
• Obsolete items are those items of inventory which have become out of date and are no longer required.

Inventory losses and waste

• Inventory losses may be quantified by comparing the physical quantity of an item held with the balance quantity recorded on the bin card and/or stores ledger card.
• There are two categories of loss: those which occur because of theft, pilferage, damage or similar means and those which occur because of the breaking of bulk receipts into smaller quantities.
• It is the second of these which are more commonly referred to as waste.
• Inventory losses must be written off against profits as soon as they occur. If the value to be written off is significant then an investigation should be made of the cause.
• When waste occurs as a result of breaking up bulk receipts, it is reasonable to expect that the extent of such wastage could be estimated in advance based upon past records. Either of two accounting treatments could then be used:
  • Issues continue to be made and priced without any adjustment and the difference at the end of the period is written off.
  • Alternatively, the issue price is increased to compensate for the expected waste.
• Suppose that a 100 metre length of copper is bought for $99. The estimated loss caused by cutting into shorter lengths as required is 1%.
• The issue price could be based on the expected issues of 99 metres, i.e. $1 per metre rather than pricing the copper at:

Control procedures to minimise discrepancies and losses

The level of investment in inventory and the labour costs of handling and recording/controlling them is considerable in many organisations. It is for this reason that organisations must have control procedures in place in order to minimise discrepancies and losses.

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