Financial Education - Sale of by-products not manufactured by the company

Following the theme of the previous post on inventories, it is to reinforce that inventories are as those physical goods intended for sale in the normal course of business, as well as those that are in the process of production or that will be used in the production of others to be sold, whether or not they are manufactured by the company.

In accordance with the foregoing, inventories are tangible goods in stock, raw material resources, products in process, and the amount of supplies that a commercial entity has available for sale or that are used to transform and subsequently sell, in order to generate a profit margin.

Inventories are recognized as current assets since their disposition is to generate future profits for the company in its normal course of business in a period of less than twelve months, there are two systems or procedures to record inventories presenting a whole structure for the accounting of these.

Perpetual system, every time the purchase of merchandise is made, the inventory account increases, and as soon as a sale is made, it decreases and the cost of the merchandise sold is recorded. This system makes it possible to keep the balance of goods in stock and the cost of goods sold up to date.

Periodic system, this type of record is made at the time of sale only recording the value and to determine the cost of sales it is waited until the end of the fiscal year, by means of the physical taking of a final inventory.