Accounting: Control Over Inventory
Types of Inventory Tracking
Perpetual inventory. Perpetual inventory is when inventory is track at each transaction. For example, if a candy store has five lollipops, sells one at noon, then the inventory shows four lollipops. There is better control using this system, because it is more up to date and mistakes in inventory are easier to catch and adjust.
11:59 -- 5
12:00 -- (-1) = 4
Periodic inventory. Periodic inventory is tracked in certain time periods. For example, the same candy store starts the month of August with 20 lollipops; they sell two the first week of the month and seven the third week. Finally, the store manager order another five lollipops to restock. The periodic inventory shows 16 lollipops on October 1st.
20 - 2 - 7 = 11
11 + 5 = 16
Control Over Inventory
The primary objective of control over inventory is to safe-guard it from loss or damage and to report the inventory in the financial statements. Documents used to track inventory includes purchase orders, receiving reports, and the vendor's invoice.
Purchase order. A purchase order is contract between a buyer and seller.
Receiving report. This is a document stating what goods were delivered to a company.
Vendor's invoice. This document is the invoice that the supplier provides to the buying company, stating what was bought and for how much.
Internal controls are procedures used by a company to keeps its assets safe and ensure accuracy and legality among the company. The five elements of internal control are as follows:
- Risk assessment
- Control environment
- Control activities
- Information and communication
The comparison of ledgers to bank statements is called "bank reconciliation", and it is performed monthly to ensure proper financial tracking. Before this reconciliation can occur, certain factors must be taken into account, such as:
- Banking errors
- Service fees
- Incorrect checks
These factors are then recorded, and when everything is said and done, the ledgers and bank statements should be balanced.