When I purchase raw materials for production in the business, I enter them in our inventory and sales workbook.
Raw material inventory entry
For instance, we purchased fabric for production of home and living products and garments. I would enter in inventory the number of yards purchased for each fabric and the cost associated with each fabric purchased.
If the purchase cost include tax and or shipping, then you calculate the portion of the tax and shipping to allocate to each raw material on the receipt in a way that when you total all the adjusted cost of each raw material on the receipt, the total will equal what you paid.
Out of inventory entry
After I enter the raw materials of fabric in inventory, when I take a fabric out of inventory for production, I will enter the number of yards taken out of inventory with a negative number to lower the remaining quantity of that fabric left in inventory.
Finished product entry
When the finished product is made, it is entered back in inventory as finished product at the cost of raw material fabric taken out of inventory and any other raw materials or supplies taken out of inventory like thread for instance. This entry readjusts the inventory level by accounting for the cost of raw materials taken out of inventory in the form of finished products thus increasing the value and quantity of the inventory back to what it was before the raw material was reduced.
Sales record
When the finished product is sold, the sale is entered in inventory and the cost of that good sold is the cost of the finished product sold. This entry adjusts the number of finished products left on hand as well as their cost.
Inventory value & cost of goods sold
By keeping the in and out of inventory up to date, at the end of the year, you will have the following data available to file your business tax return:
Beginning year inventory value
Purchases during the year – out of inventory during the year + Production during the year
Cost of goods sold
Year-end inventory value.
Uses of inventory records
Among many other reasons, inventory records allow you to determine the cost of goods sold to deduct on your tax return and to know your business asset.
If your business carries inventory, you might need to file Form 1125-A Cost of Goods Sold if you file Form 1065 Partnership business tax return, or Form 1120S if you file S Corp business tax return. If you are a sole proprietor, then you will complete Schedule C Part III Cost of goods sold section with your inventory data.
The cost of goods sold is the cost that is tax deductible on these business tax returns.
Your remaining inventory value is asset of your business and is reflected in your business balance sheet in the assets side of the balance sheet.
Conclusion: How do you do raw material inventory?
The video explains one way to use manage your raw material inventory using Excel spreadsheet.
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