A company’s inventory records should show (1) the quantity of each kind of material on hand and (2) its cost. The most desirable method of achieving this result is to integrate the materials accounting system with the general ledger accounts. All purchases of materials on account are recorded as a debit to Materials in the general ledger. The materials account is a control account that is supported by a subsidiary materials ledger containing an individual account for each type of material carried in stock.
Periodically, the balance of the control account and the total of the subsidiary ledger accounts are compared, and any significant variation between the two is investigated. Each of the individual materials accounts in the materials ledger shows (1) the quantity on hand and (2) the cost of the materials. To keep this information current, it is necessary to record in each individual account, on a timely basis, the quantity and the cost of materials received, issued, and on hand. Copies of the purchase order and receiving report are approved by the purchasing agent and sent to the accounting department.
Upon receiving the purchase order, the accountant enters the date, purchase order number, and quantity in the ‘‘On Order’’ columns of the appropriate materials ledger account. When materials arrive, the accounting department’s copy of the receiving report serves as the basis for posting the receipt of the materials to the materials ledger account. The posting shows the date of receipt, the number of the receiving report, the quantity of materials received, and their unit and total cost.
When materials are issued, two copies of the materials requisition go to the accounting department. One copy is used in posting the cost of requisitioned materials to the appropriate accounts in the job cost ledger (individual jobs in process) and factory overhead ledger (individual factory overhead accounts). Direct materials are charged to the job to which they were issued, and indirect materials are charged to the appropriate factory overhead account. The other copy of the materials requisition becomes the basis for posting to the materials ledger accounts.
The posting shows the date of issue, the number of the requisition, the quantity of materials issued, and their unit and total cost. When materials are returned to the storeroom, a copy of the returned materials report goes to the accounting department. The cost of the returned materials is entered on the report and posted to the appropriate materials ledger account. The cost assigned to the returned materials should be the same as that recorded when the materials were issued to the factory.
The copy of the returned materials report is then routed to the cost accountant in charge of the job cost and factory overhead ledgers. Direct materials returned are credited to the specific job for which they were initially issued, and indirect materials returned are credited to the appropriate factory overhead account. After each receipt and issue of materials is posted to the materials ledger accounts, the balances are updated. These updates could be made at the end of the accounting period, when ending inventories are determined for financial reporting purposes.