To practice: Prepare a correct trial balance.

To practice:
All of the accounts have normal balances. Journalize the following tranzactions
ACCOUNT DEBIT CREDIT Carl Brown decided to establish an advertising agency.
Cash 6 200 Brawn’s business transactions for the first month of
Office Equipment 18 600 operations ending October 31, 2016, were as follows:
Accounts Payable 4 100 • Brown invested $40 000 cash in the business
Owner,Capital 22 250 • Recorded and paid office rent for one month, $1 600
Owner, Drawing 5 000 • Purchased office equipment on account, $ 11 700
Income for Services 12 000 • Paid cash for office supplies, $700
Wages Expense 6 000
• Received and paid telephone bill, $425
Rent Expense 1 800
• Invoiced $5 120 for advertising fees earned
• Received $3 200 for advertising fees earned
Utilities Expense 750
• Recorded and paid $2 200 wages to office secretary
53 500 23 200

CURRENT ASSETS Inventories are assets:

Inventories (a)held for sale in the ordinary course of business;

(b)in the process of production for such sale; or

(c)in the form of materials or supplies to be consumed in

the production process or in the rendering of services.

Discussion: The distinction between inventory

and fixed asset
• Raw materials: inventories purchased for direct use in the
It depends on the company’s intent in acquiring manufacturing process.
/producing the asset.
• Consumables: inventories purchased for use in the
Example: manufacturing process (fuel, spare parts, seeds, planting
Microsoft classifies a computer system as inventory materials.
because its intent in manufacturing the asset is to offer it • Merchandise: goods bought and held for resale
for resale.
This same computer in the hands of an accounting firm • Packages: reusable packaging, purchased or
manufactured, designed for sold products that can be
would be classified as equipment because its intent in stored temporarily by third parties, with the restitution
buying the asset from Microsoft is to use it in the long- obligation as provided for in contracts
term operation of the business.
• Petty inventories: goods which are used for more than 1
year, but with a value of less than the one for fixed assets
Other examples? (2.500 lei): printer, phone, ipad
 Initial measurement
Acquisition
• Finished goods: manufactured products that have been The acquisition cost comprises:
completed and are ready for sale

• Semifinished goods: products whose technological (a)its purchase price, including import duties and non-
process has been completed in one manufacturing phase refundable purchase taxes, after deducting trade
discounts and rebates;
and who pass in other departments (manufacturing
phases) or are delivered to third parties;
(b)any costs directly attributable to bringing the asset to
• Work in progress: products in the process of being the location and condition necessary for it to be capable
manufactured but are not completed. of operating in the manner intended by management
(costs of site preparation, initial delivery and handling
costs, installation and assembly costs).
82

Compute...
VAT – value added tax rule
Example 1
International Co. purchases December 30 merchandise at a
price of 75.000 lei. The company obtained a trade discount When you buy – VAT deductible A+ D (can be received
for this acquisition of 5.000 lei. Since the goods are from the state)
imported, there are additional import duties of 7.000 lei
directly attributable. Transportation, handling and insurance
costs of 4.000 lei have been incurred for marchandise. When you sell – VAT collectable L + C (must be paid to the
state)
Calculate the cost of marchandise at initial measurement.

Acquisition cost = 75.000 – 5.000 + 7.000 + 4.000 = 81.000 lei

84

Journalize...
Example 2. The company purchases raw materials Initial measurement
/consumables /merchandise /petty inventory at a cost of Production
12.000 lei, VAT 20%, on account.
Acquisition of petty inventory
Production cost includes the acquisition cost of materials and
1. Nature of
transaction consumable, as well sd other directly atributtable expenses
(labour, utilities, depreciation, other service)
2. Changes in Petty inventory A + D
elements
3. Functioning VAT deductible A + D
rules
4. Corresponding Suppliers L + C
Accounts
5. Accounting % = Suppliers 14.400 lei
Formula Petty inventory 12.000 lei 86
VAT deductible 2.400 lei
Compute... Journalize...
Example 4 The company obtains furniture from production
Exemple 3
at a cost of 49.000 lei.
International Co., a producer of furniture, incures the 1. Nature of Production of finished goods
following expenses during the current month: raw materials transaction
25.000 lei, consumables 4.000 lei, utilities for production
2. Changes in Finished goods A + D
spaces 6.000 lei, wages for employees 9.000 lei, depreciation elements
for production equipments 5.000 lei, administrative costs 3. Functioning Revenues from production OE + C
6.000 lei, marketing expenses 2.000 lei. rules
4.
Corresponding
Production cost = 25.000 + 4.000 + 6.000 + 9.000 + 5.000 =
Accounts
49.000 lei
5. Accounting Finished goods = Revenues from production 49.000
Formula
! Administrative costs and distribution /marketing expenses 87
are not included in the production cost.

Initial measurement Journalize...

Donation, grant, chargeless/contribution to Example 5: The company receives an european funding for
capital a quantity of raw materials of 40.000 lei.

Fair value – the sum for which an assets could be freely 1. Nature of Recording the grant/subsidy
exchanged between informed parties , in a transaction transaction
with an objectively determined price (usualy determined
by evaluators) 2. Changes in Raw materials A + D
elements
3. Functioning Revenues from subsidies OE + L
rules
4.
Corresponding
Accounts
89 5. Accounting Equipment = Investment subsidies 40.000 lei
Formula

Journalize...
Example 6: The owner brings merchandise as his Output ways for inventories
contribution to the share capital of 20.000 lei.
• Consumption (usually in production – raw materials,
1. Nature of transaction Contribution to the capital
consumables)

2. Changes in elements Merchandise A + D • Sale (Inventories are given to clients for cash -
3. Functioning rules Share capital OE + C merchandise, finished goods)
4. Corresponding
Accounts
Rule!
Sale has 2 steps:
5. Accounting Formula Vehicle = Share capital 20.000 lei 1.Sale ( ☺ )
1.Sale
2.Disposal of inventory (  )
2.Disposal
92

• Non ordinary events (natural disasters, waste, theft)

 Journalize...
Journalize... Example 8: The company sells merchandise to a client on
Example 7: The company consumes raw materials of account at a price of 10.000 lei, TVA 20%. The acquisition
10.000 lei in the production process. cost was 6.000 lei.
Step 1
1. Nature of Consumption of raw materials
transaction 1. Nature of transaction a) Sale of merchandise
☺
2. Changes in Raw materials A - C
elements 2. Changes in elements Clients A + D
3. Functioning 3. Functioning rules
Expenses with raw materials OE - D
rules 4. Corresponding Sale revenues OE + C (the price)
4. Accounts
Corresponding VAT collectable L + C
Accounts
5. Accounting Expenses with raw materials= Raw materials 10.000 5. Accounting Formula Clients = % 12.000 lei
Formula Sale revenues 10.000 lei
VAT collectable 2.000 lei

Journalize...
Example 9: The company sells finished goods to a client on
Step 2 account at a price of 9.000 lei, TVA 20%. The production cost
was 5.000 lei.
1. Nature of transaction Discharging the inventory Step 1

1. Nature of transaction a) Sale of finished goods

2. Changes in elements Merchandise A – C ☺

3. Functioning rules Expenses with merchandise (Cost 2. Changes in elements Clients A + D
4. Corresponding of goods sold) OE – D (the cost) 3. Functioning rules
Accounts 4. Corresponding Sale revenues OE + C (the price)
Accounts
VAT collectable L + C
5. Accounting Formula Expenses = Merchandise 6.000 lei
5. Accounting Formula Clients = % 10.800 lei
Sale revenues 9.000 lei
VAT collectable 1.800 lei

Step 2 Output valuation methods

When you buy inventory from suppliers, the price tends to

1. Nature of Discharging the inventory change over time, so you end up with a group of the same
transaction items, but with some units costing more than others.
 As you sell or consume items from inventory, you have to
2. Changes in Finished goods A – C decide on a policy of whether to charge items to the cost of
elements Revenues form production OE – D (the cost) goods sold that were presumably bought first, or bought
3. Functioning last, or based on an average of the costs of all items in
rules stock.
4.
Corresponding
Accounts Your choice of a policy will result in using either:
5. Accounting Revenues form production = Finished goods 5.000 the first in first out method (FIFO),
Formula the last in first out method (LIFO) or
the weighted average method (WAC).
Example a) FIFO
A construction company has the following situation of OB 01.03: 1.000 bags x 50 lei /bag
cement inventory in November N: Input 14.03: 3.000 bags x 60 lei /bag
01.03: 1.000 bags x 50 lei /bag Consumption 16 03: 2.500 bags:
1.000 bags x 50 lei /bag +1.500 bags x 60 lei /bag = 50.000 + 90.000 =
Acquisitions during November: 140.000 lei
14. 03: 3.000 bags x 60 lei /bag
21. 03: 2.000 bags x 70 lei / bag Left inventory: 1.500 bags x 60 lei /bag
25. 03: 1.000 bags x 80 lei / bag
Input 21.03: 2.000 bags x 70 lei /bag
Input 25.03: 1.000 bags x 80 lei /bag
Consumptions during November: Consumption: 4.000 bags:
a) 16.03: 2.500 bags; 1.500 bags x 60 lei /bag + 2.000 bags x 70 lei /bag + 500 bags x 80 lei
b) 27.03: 4.000 bags. /bag = 270.000 lei

Compute the value of consumed inventories at the end of Total consumption = 140.000 + 270.000 = 410.000 lei
November.
Closing balance: 500 bags x 80 lei /sac = 40.000 lei

b) LIFO c) WAC
Opening balance 01.03: 1.000 bags x 50 lei /bag
Input 14.03: 3.000 bags x 60 lei /bag
Consumption 16 03: 2500 bags WAC = Σ (Input* Cost)/ Σ Input
2.500 bags x 60 lei /bag = 150.000 lei

Left inventory: 1.000 bags x 50 lei /bag + 500 bags x 60 lei /bag
WAC = (1.000 x 50 + 3.000 x 60 + 2.000 x 70 + 1.000 x 80)
/ (1.000+ 3.000+ 2.000 + 1.000)
Input 21.03: 2.000 bags x 70 lei /bag = 64,29 lei /bag
Input 25.03: 1.000 bags x 80 lei /bag
Consumtion: 4.000 bags
1.000 bags x 80 lei /bag + 2.000 bags x 70 lei /bag + 500 bags x 60 lei Total consumption value = 64,29 lei /bag * (2500 +4.000) = 417.885
/bag + 500 bags x 50 lei /bag = 275.000 lei lei
Closing balance: 500 bags x 64,29 lei /bag = 32.145 lei
Consum total = 150.000 + 275.000 = 425.000 lei
Ramas in sold (SF): 500 bags x 50 lei /bag = 25.000 lei

Impairment of inventory

Impairment = temporary loss of value, usualy determined 1.Nature of Impairment of merchendise

at the end of the year transaction
Impairment = Book value – Realisable value
2. Changes in Impairment of merchendise A - C
elements Impairment of current assets expenses OE -
Example:
3. Functioning D
At the 31st of December the market value (realisable rules
value) of merchendise similar to the one owned by the 4. Corresponding
company is 18.000 lei. The book value registred in Accounts
accounting is 20.000 lei. 5. Accounting Expenses = Impairment of merchendise 2.000
Formula lei
Realisable Value > Book value => Loss of value (Impairment) 103
Impairment = 20.000 – 18.000 = 2.000 lei