Inventory: Time for a little more... advanced topic

O Inventory, inventory! Wherefore art thou inventory? I couldn't have said it better than that pining lover of by gone days. There are few areas in accounting that allow such divergent views, each of which sustain an ardent troupe of followers.

Pick your side!

"Deny thy LIFO; and refuse your tax advantages"

The GAAP treatment of inventory is really that silly. Here is why.

The Accounting Equation Know it!

Just make it easy on your self. Get this little gem in your head and leave it there.

Then you might as well remember the other way it is commonly shown,

But really it doesn't take more than a 5th grade math education to see that those are the same. Lets work through why this is basically what double entry accounting is built around.

History of Accounting - The second oldest profession

Oh accounting, where to begin? It is funny to think about but every living creature practices, in some form, accounting. Humans of course keep track of debits and credits. Animals do accounting differently albeit for the same purpose. The Bird of Paradise uses accounting to choose mates and has a corresponding elaborate set of performance criteria before a transaction can be realized.

Ok, thats a little stupid. It's a fun picture though right? (thank you National Geographic) There is definite evidence that very early in human history people had started keeping track of who owed what to whom. Some evidence suggests that this behavior may have started as far back as 76,000 years ago. There is also evidence that people had employment in accounting and bookkeeping in Roman times.

Double entry accounting AKA Debit and Credit - The epic conclusion

I know, I know, I set you up from the beginning. Here you thought I was talking about beer pong but BAM - Accounting. 

Don't think of Debit as an increase think of it as left. Don't think about Credit as decrease think about it as right. In this situation you would credit A/R for the amount of the payment and debit cash for the same amount.

Dr. Cash          XXXX
          Cr. A/R          XXXX

(for those that want to see the journal entry)-DR. and CR. are common abbreviations for Debit/Credit

Double entry accounting AKA Debit and Credit

This is one of the most basic and most confusing aspects of accounting. When professors present this it is almost always glossed over and tossed aside with no real depth. Really understanding double entry accounting and why debits have to match credits will be a key to success in studying accounting and here's why. Take an moderate/advanced question for example. 

If Ajax company has revenue of $50,000 and achieved a 25% gross profit in 20x2 what was the inventory purchases for the year ending 20x2?
20x1 Ending inventory is $23,000
20x2 Ending inventory is $30,000

Most accountants would look at this problem would be able to do it mentally -this post is not for you. Sit back, watch the most recent episode of The League or Grey's, or work through the 230 review notes your senior just left on FSA's that are due tomorrow.

My introduction

A little about me. Most recently I received a Master of Accounting after earning a Bachelor of Science in Accountancy, both from the W.P. Carey School of Business at Arizona State University. As you can see from the picture, in addition to graduate studies I also juggled being married and having kids. My wife and I have two awesome boys age 4 and 11 months. In fact the only reason I am able to work on this long time ambition of mine is because Mr. 11 months is kinda sleeping.