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Chapter 14

Year-end adjustments to inventory

At the end of the year two basic adjustments are required to recognise opening and
closing inventory correctly in the financial statements.

2.1 Opening inventory

Inventory brought forward from the previous accounting period is assumed to have
been used to generate assets for sale during the current accounting period. It must
be removed from inventory and recognised as an expense in the current accounting
period as follows:

Debit Opening inventory in cost of sales (SOPL)

Credit Inventory (SOFP)

2.2 Closing inventory

The unused inventory at the end of the accounting period is removed from purchase
costs and carried forward as an asset into the following accounting period as follows:

Debit Inventory (SOFP)

Credit Closing inventory in cost of sales (SOPL)

When these accounting entries have been recorded, cost of sales is correctly stated
by including the opening inventory and excluding the closing inventory. The inventory
ledger account shows the closing inventory for the asset remaining at the end of the
accounting period.

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