Compute the inventory valuation and cost of goods sold using average costing method¶
The manual inventory valuation method suggest that the valuation of an inventory has to be manage manually in financial accounting. The periodic journal entry has to be passed on regular internal so keep updated the valuation in balance sheet and cost of goods sold in profit and loss account.
On every regular internal an accounting entry has to be passed as below:
| Description | Debit | Credit |
|---|---|---|
| Inventory Valuation | 800 | |
| Cost of Goods Sold | 800 |
To compute the cost of goods sold use the below formula
COGS = Inventory Valuation as per Balance sheet - Inventory Valuation
as per Inventory
Product Cost price¶
As your inventory costing method is average, you are allowed to change the cost price of the product, assumed that you increase the cost price.
Tip
Make sure you change the cost price on the product once your valuation is equal for inventory and balance sheet, else you may have a wrong cost of goods sold entry.
When you see a COGS is having a negative value it means that your value of the inventory increased in warehouse this should be reflect in the balance sheet too.
To increase the value in balance sheet you have to pass below journal entry
| Description | Debit | Credit |
|---|---|---|
| Inventory Valuation | 800 | |
| Inventory Valuation Difference | 800 |
Or, when you see a COGS is having a positive value it means that your value of the inventory decreased in warehouse and this should be reflect in the balance sheet too.
To decrease the value in balance sheet you have to pass below journal entry
| Description | Debit | Credit |
|---|---|---|
| Inventory Valuation | 800 | |
| Inventory Valuation Difference | 800 |