Inventory — Accounting Entries
Learn how businesses record inventory purchases, goods received,
cost of goods sold, purchase returns, stock shortages, inventory
write-downs and other common inventory transactions.
These practical scenarios explain how inventory movements affect
assets, expenses, liabilities and reported profits.
unless stated. Inventory accounting depends on the applicable accounting
framework and the company’s inventory valuation method. The examples
assume a perpetual inventory system unless otherwise specified.
Purchasing Inventory on Credit
Situation: A trading company purchases goods worth
₹1,00,000 from a supplier on credit for resale to customers.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory | 1,00,000 | — |
| Accounts Payable — Supplier | — | 1,00,000 |
Why this entry?
- Inventory increases because the company now owns additional goods for resale.
- Accounts payable increases because the supplier has not yet been paid.
- The purchase is recorded as inventory rather than an immediate expense because the goods have not yet been sold.
purchases of goods for resale are recorded directly in the Inventory
account. Their cost generally becomes an expense when the goods are sold.
Paying the Inventory Supplier
Situation: The company pays the supplier ₹1,00,000
through its bank account, settling the outstanding inventory invoice.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Payable — Supplier | 1,00,000 | — |
| Bank | — | 1,00,000 |
Why this entry?
- The supplier liability decreases because payment has been made.
- The bank balance decreases by the same amount.
- The inventory balance remains unchanged by the payment itself.
payable. It does not create another inventory purchase entry.
Recording Goods Received Before the Supplier Invoice
Situation: A company receives inventory worth ₹40,000
from a supplier on 28 March. The supplier’s invoice has not arrived by
month-end, but the company has obtained control of the goods and can
reliably determine their cost.
Entry — At the end of March
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory | 40,000 | — |
| Goods Received Not Invoiced (GRNI) / Accrued Payable | — | 40,000 |
When the supplier invoice arrives
Assuming the invoice matches the goods receipt and the accounting
system uses a GRNI clearing process:
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| GRNI / Accrued Payable | 40,000 | — |
| Accounts Payable — Supplier | — | 40,000 |
Why this entry?
- The company recognizes inventory when the relevant recognition criteria are met, rather than waiting automatically for the invoice.
- GRNI represents goods received for which the supplier invoice has not yet been processed.
- When the invoice is posted, the temporary accrual is cleared and the supplier payable is recognized.
and three-way matching between the purchase order, goods receipt and
supplier invoice. Actual posting mechanics depend on the ERP and
accounting policy.
Recognizing Cost of Goods Sold
Situation: A company sells goods to a customer for
₹1,50,000. The original cost of the goods sold is ₹90,000. Assume the
sales revenue has been recorded separately.
Entry — To record the cost of inventory sold
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Cost of Goods Sold (COGS) | 90,000 | — |
| Inventory | — | 90,000 |
Sales entry, recorded separately
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Receivable — Customer | 1,50,000 | — |
| Sales Revenue | — | 1,50,000 |
Result: Gross profit on this sale is ₹60,000 before
other expenses and taxes.
Why this entry?
- The sale creates revenue.
- The inventory cost of the goods sold becomes an expense.
- The inventory asset decreases by the cost of the goods that left the business.
two accounting effects: recognition of revenue and recognition of the
related inventory cost as COGS.
Recording a Purchase Return to the Supplier
Situation: A company returns damaged goods costing
₹10,000 to its supplier. The original supplier invoice remains unpaid,
and the supplier issues a credit note.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Payable — Supplier | 10,000 | — |
| Inventory | — | 10,000 |
Why this entry?
- The company no longer holds the returned goods as inventory.
- The supplier’s credit note reduces the amount payable.
- The original purchase cost is reversed for the goods returned.
a purchase return generally reduces inventory and the related supplier
payable. If the supplier has already been paid, the debit may instead
represent a refund receivable or another agreed settlement.
Recording Freight on Inventory Purchases
Situation: A company pays ₹5,000 to transport
purchased inventory to its warehouse. The transportation cost is
directly attributable to bringing the inventory to its present
location and condition and qualifies for capitalization.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory | 5,000 | — |
| Bank / Accounts Payable | — | 5,000 |
Why this entry?
- Qualifying transportation costs form part of the cost of inventory.
- The inventory’s total recorded cost increases.
- The cost will generally flow into COGS when the related goods are sold.
inventory to its present location and condition where the applicable
standard permits or requires capitalization. Selling and unrelated
distribution costs are generally treated differently.
Recording an Inventory Shortage
Situation: The inventory ledger shows stock worth
₹50,000, but a physical count reveals that inventory worth only ₹47,000
remains. After investigation and approval, the company confirms a
shortage of ₹3,000 and cannot recover the amount.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory Shrinkage / Inventory Loss Expense | 3,000 | — |
| Inventory | — | 3,000 |
Why this entry?
- The physical count confirms that the recorded inventory is overstated.
- The inventory balance is reduced to reflect the verified quantity and value.
- The loss is recognized in the appropriate expense account.
posting adjustments. Shortages may result from theft, damage, recording
errors, unit-of-measure mistakes or unposted transactions.
Writing Down Inventory to Net Realizable Value
Situation: Inventory has a recorded cost of ₹80,000.
Because of damage and reduced selling prices, its net realizable value
is determined to be ₹65,000. Under the applicable accounting framework,
the inventory must be written down to the lower amount.
Write-down = ₹80,000 − ₹65,000 = ₹15,000.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory Write-Down Expense | 15,000 | — |
| Inventory / Allowance for Inventory Write-Down | — | 15,000 |
Why this entry?
- The inventory’s recorded cost exceeds the amount expected to be realized from its sale, after considering the relevant completion and selling costs.
- The carrying amount is reduced to the required valuation.
- The write-down is recognized as an expense in the appropriate period.
measured at the lower of cost and net realizable value. The applicable
local accounting framework should be followed.
Reversing a Previous Inventory Write-Down
Situation: Inventory originally cost ₹80,000 and was
previously written down by ₹15,000 to ₹65,000. In a later period, the
circumstances improve and its net realizable value rises to ₹74,000.
Under the applicable framework, the previous write-down may be reversed,
but not beyond the original cost.
Permitted reversal in this example: ₹74,000 − ₹65,000 = ₹9,000.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory / Allowance for Inventory Write-Down | 9,000 | — |
| Reversal of Inventory Write-Down / Expense Reduction | — | 9,000 |
Why this entry?
- The inventory’s net realizable value has increased.
- The earlier write-down is reversed to the extent permitted by the applicable framework.
- The revised carrying amount is ₹74,000, still below the original cost of ₹80,000.
write-down is reversed when the circumstances that caused it no longer
exist or there is clear evidence of an increase in net realizable value.
The revised carrying amount cannot exceed the original cost.
Recording Closing Inventory Under a Periodic Inventory System
Situation: A company uses a periodic inventory system.
At the end of the accounting period, a physical stock count and valuation
establish that closing inventory is worth ₹1,50,000.
Illustrative closing entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Closing Inventory | 1,50,000 | — |
| Inventory Change / Cost of Goods Sold Adjustment | — | 1,50,000 |
Important: This is a simplified illustration of the
closing-inventory adjustment. The exact journal entry depends on the
periodic inventory method and the accounts used by the company.
Why this entry?
- Under a periodic system, inventory and COGS are determined using the opening stock, purchases and closing stock calculation.
- The physical count provides evidence of the quantity held at period-end.
- Closing inventory is recognized as an asset and affects the calculation of COGS.
COGS = Opening Inventory + Net Purchases and Other Applicable Costs −
Closing Inventory. The journal entries used to establish closing inventory
depend on the accounting system’s closing process.