Raw Materials Inventory

Code: 1151
👁 Views: 107

Account Information

Financial Statement Statement of Financial Position
Normal Balance Debit

Definition

Raw materials used in production

Note: This account may be broken down into sub-ledgers as needed (e.g., customer/supplier/bank names or branches).

Common Journal Entries

Purchased raw materials on credit

Dr. Raw Materials Inventory
Cr. Accounts Payable

Issued raw materials to production

Dr. Work in Progress
Cr. Raw Materials Inventory

Returned raw materials to supplier

Dr. Accounts Payable
Cr. Raw Materials Inventory

Inventory adjustment for raw materials

Dr. Inventory Variance Expense
Cr. Raw Materials Inventory

📐 IFRS vs US GAAP Accounting Treatment

IFRS IAS 2 Inventories
US GAAP ASC 330 Inventory
⚠️ Key Difference Between IFRS and US GAAP

IFRS prohibits LIFO; GAAP permits it

❓ Frequently Asked Questions

Q: What is the difference between Raw Materials Inventory and Finished Goods Inventory?

A: Raw Materials Inventory consists of materials that go into the manufacturing process (e.g., steel, plastic, wood), while Finished Goods Inventory consists of completed products ready for sale to customers.

Q: What is the FIFO inventory valuation method?

A: FIFO (First-In, First-Out) is an inventory valuation method that assumes the oldest units in inventory (those acquired first) are the first to be sold. Consequently, the ending inventory consists of the most recently purchased units. This method is permitted under both IFRS and GAAP.

Q: What is the LIFO method and is it permitted?

A: LIFO (Last-In, First-Out) is a method that assumes the most recently acquired units are the first to be sold. This method is **prohibited under IFRS** but is **permitted under US GAAP** with specific disclosures (LIFO Reserve).

Q: How is inventory valued on the financial statements?

A: Inventory is valued on the balance sheet at the lower of cost or net realizable value (LCNRV). This means inventory is valued at either its cost or its net realizable value, whichever is lower, to avoid overstating asset value.