tailieunhanh - THEME: ACCOUNTING FOR INVENTORY

Retrospective premium adjustments – Some policies have their final premium determined based on the losses incurred under the contract. Such “retrospectively rated” policies result in an initial premium, followed by a series of adjustment premium entries based on the covered losses under the policy (subject to limitations such as minimums and maximums, etc.) These adjustments can sometimes continue for many years after the original policy term has expired. For example, large workers’ compensation or commercial liability contracts in the United States can be written on a retrospectively rated basis such that premium adjustments continue for 10 years. | THEME ACCOUNTING FOR INVENTORY By John W. Day MBA ACCOUNTING TERM Inventory Inventory can be defined as goods being held for resale. In manufacturing inventory can be raw materials work-in-process and finished goods. FEATURE ARTICLE Understanding Inventory Accounting Occasionally I do live seminars on the basics of accounting and have found that many participants had difficulty in understanding how accounting for inventory works. Let s be clear working with inventory can be complex depending on the type and size of business. However the basic concepts of inventory are not hard to grasp and you really should have some familiarity with them. For those who already work with and understand inventory please bear with me as I lay out the fundamentals. Also this newsletter is a little longer and more technical than usual so you may want to take your time reading it. You may recall from my August newsletter issue 64 titled Cost of Goods Sold the inventory formula Beginning Inventory Add purchases during the month Subtract ending Inventory - Cost of Goods Sold The first step is to conceptualize the inventory process . In other words think about what is going on. For example suppose your company is in business to sell a product. The product is acquired either by manufacturing it or purchasing it as a finished product. During an accounting period such as one month all or a portion of the inventory is sold. Hopefully the cost of the product did not exceed its sale price so that a profit was realized. With the money from the profit more inventory can be purchased to sell cover overhead expenses and pay yourself. The challenge is to determine as accurately as possible your Cost of Goods Sold COGS . There are various ways to do this depending on whether a periodic or perpetual system of recording inventory is used. In case you are unfamiliar with these terms let s review them Copyright 2008 John W. Day 1 Periodic Periodic inventory accounting involves