Recording movements of inventory on inventory cards under a perpetual system using the First In First Out and identified cost methods for purchases, sales, returns, drawings and inventory used

What this dot point is asking

VCAA wants you to maintain inventory cards under a perpetual system, apply the First In First Out and identified cost methods, and record purchases, sales, sales returns, purchase returns, drawings and inventory used, with the card always reconciling to the Inventory ledger account.

The perpetual system

The card has three sections: IN (purchases and purchase-related items), OUT (cost of inventory leaving through sales, returns to supplier, drawings and inventory used), and BALANCE (what remains, shown as cost layers).

Cost-flow methods

First In First Out assumes the earliest units bought are the first sold. The OUT column therefore uses the oldest unit costs, and the BALANCE shows the most recent costs. Identified cost tracks each physical item at its actual purchase cost and is appropriate where items are individually distinguishable and high in value, such as cars or jewellery.

Worked inventory card

Recording each type of movement

Each movement hits the inventory card in a predictable place. A purchase of stock is recorded IN at its cost price (the GST-exclusive amount), creating or extending a cost layer. A sale is recorded OUT at cost using FIFO, while the selling price is recorded separately in the Sales and Cost of Sales accounts; the card itself only ever tracks cost, never selling price. A purchase return (goods sent back to the supplier) comes OUT at the cost they were bought for, and a sales return (goods coming back from a customer) goes back IN at the cost they were sold at, which restores the original cost layer. Drawings of stock by the owner and inventory used in the business both go OUT at cost, but to Drawings or an expense rather than to Cost of Sales. Keeping these destinations straight is essential because each routes to a different ledger account.

The two cost-flow methods compared

First In First Out and identified cost answer the same question differently: which cost attaches to the units leaving. FIFO is an assumption applied to interchangeable stock, releasing the oldest cost layers first, so in a period of rising prices it reports a lower cost of sales and a higher closing inventory value than other assumptions would. Identified cost is used when each item is individually distinguishable and high in value, such as motor vehicles or jewellery, so the actual cost of the specific item sold is recorded. VCAA expects you to justify which method suits a given business: interchangeable, fast-moving stock points to FIFO, while unique, traceable, high-value items point to identified cost.

Reconciling the card to the ledger and a stocktake

The inventory card is a subsidiary record that must reconcile to the Inventory control account in the General Ledger: the closing balance on the card equals the ledger balance, because every IN and OUT on the card corresponds to a posting to Inventory. A physical stocktake then compares the actual units counted against the card balance. If the count is lower than the card, the shortfall is an inventory loss (recorded as an expense); if higher, it is an inventory gain (recorded as revenue). This three-way agreement, card to ledger to stocktake, is the control that detects theft, damage, recording errors and spoilage, which is why VCAA stresses that the card must always reconcile.

Why this matters

The inventory card feeds three places: the cost of sales figure in the Income Statement, the closing Inventory in the Balance Sheet, and the Inventory ledger account, which must reconcile to the card. A physical stocktake compared to the card reveals inventory loss or gain.