Inventory ownership, systems, and controls

Learning goals

• Decide whether goods in transit, consigned goods, and customer returns belong in inventory.
• Compare periodic and perpetual inventory systems and their entries.
• Calculate inventory from a physical count adjusted for ownership.
• Design controls that connect quantities, costs, and source documents.

Prerequisite check

Inventory is an asset until sold; then its cost becomes Cost of Goods Sold. Under a perpetual system, every sale normally triggers both a revenue entry and a cost entry.

Vocabulary

• Goods in transit: shipped goods not yet physically received.
• FOB shipping point / FOB destination: traditional course terms indicating when control normally transfers, subject to the actual contract.
• Consignor: owner who sends goods to another party to sell.
• Consignee: agent holding consigned goods but not owning them.
• Periodic system: updates inventory and cost of goods sold at period-end.
• Perpetual system: updates inventory continuously with purchases and sales.

Core idea

The count begins with what is on the premises, but financial reporting follows ownership/control—not location alone. The inventory system changes *when* records are updated, not the underlying economics. Even a perpetual record needs a physical count to detect damage, theft, and data errors.

Why this treatment makes sense

Including someone else's consigned goods would overstate resources. Excluding owned goods in transit would understate them. Periodic systems concentrate the cost calculation at period-end; perpetual systems provide timely margins and quantities, but only if barcodes, item masters, and receiving processes are controlled.

A repeatable method

1. Start with the dated physical count and priced count sheets.
2. Review the last and first receiving reports and sales invoices around year-end.
3. Read shipping terms and evidence of control transfer; do not rely on location alone.
4. Add owned goods omitted from the premises count; remove goods held for others.
5. Identify damaged or obsolete items requiring lower measurement.
6. Reconcile the adjusted count to perpetual records and investigate differences.

Worked example

On December 31, North Shore Boards counts $74,600 on site. Included are $4,200 of boards held on consignment for a supplier. Excluded are (a) $6,800 of the company's goods sent to a retailer on consignment and (b) $3,500 purchased FOB shipping point and shipped December 29, received January 3. Goods costing $2,100 sold FOB destination on December 30 are still in transit to the customer and were excluded from the count.

Correct inventory = $74,600 − $4,200 + $6,800 + $3,500 + $2,100 = $82,800.

For a perpetual $5,000 inventory purchase on account and a later $8,000 sale of goods costing $4,700:

Table: Perpetual purchase and sale entries

Under a periodic system, the purchase uses Purchases and no cost entry is made at sale. Period-end cost of goods sold is beginning inventory + net purchases − ending inventory.

Journal, ledger, and statement connection

Correct ending inventory appears as a current asset and reduces cost of goods sold. In a perpetual system, a shortage produces debit Inventory Shrinkage or Cost of Goods Sold and credit Inventory. In a periodic system, shortages are usually embedded in the period-end cost calculation unless separately analyzed.

Common mistakes

• Treating physical possession as automatic ownership.
• Including a consignee's goods or excluding the consignor's goods.
• Recording only one entry for a perpetual sale.
• Assuming a perpetual system removes the need for a count.
• Applying a shipping label without checking the contract, shipping date, and cut-off evidence.

Guided practice

A count is $40,000, including $1,500 held for another owner. Company goods costing $2,300 are at a consignee. Correct inventory is $40,800: subtract $1,500 and add $2,300. State the reason before calculating: only the company's controlled goods belong.

Independent practice

1. Periodic records show beginning inventory $18,000, net purchases $92,000, and ending inventory $24,500. Calculate cost of goods sold.
2. Record a perpetual cash sale of $3,000 plus HST; goods cost $1,650.
3. A warehouse worker can create items, receive quantities, and approve count adjustments. Propose one stronger control.

Self-check and solutions

1. Cost of goods sold = $18,000 + $92,000 − $24,500 = $85,500.
2. Debit Cash $3,390; credit Sales Revenue $3,000; credit HST Payable $390. Debit Cost of Goods Sold $1,650; credit Inventory $1,650.
3. Separate item-master creation or count-adjustment approval from custody/receiving; require independent cycle counts and review exception reports.

Retrieval practice

1. Who owns goods on consignment: consignor or consignee?
2. Which system records cost of goods sold at each sale?
3. Why perform a physical count with perpetual records?

Answers: consignor; perpetual; to detect shrinkage, damage, and record errors.

Exam-style application

The unadjusted count is $96,000. It excludes $7,000 owned goods in transit and includes $5,500 supplier-owned consignment goods. What are the effects if no correction is made?

Solution: Correct inventory is $97,500, so inventory is understated $1,500. Cost of goods sold is overstated $1,500; profit, equity, and total assets are understated $1,500. The net answer does not replace documenting both ownership items.

Lesson summary

Inventory follows control and ownership, not just location. The system determines recording timing, while cut-off tests, counts, and separated duties protect the result.