How to Adjust Inventory on Balance Sheets

Use the ending balance of the inventory account as the line item summary on the balance sheet.

A balance sheet includes line item entries for what a company owns listed under assets. What the company owes it lists under liabilities. It is important to reflect inventory balances accurately on the balance sheet, as inventory is a part of a company's assets and represents the potential for revenue when sold. How an accounting department adjusts for inventory reported on the balance sheet is dependent on the inventory method used.

Instructions

1. Use the first-in-first-out or FIFO method of calculating inventory. This means the inventory ending balance entry on the balance sheet will be the newest, most valuable inventory on hand. In the inventory account, adjust inventory by crediting the account for inventory sold in the period based on the oldest item in inventory. Debit the inventory account for new inventory production in the period at the current inventory value. Add these amounts together to obtain the ending balance, and transfer this as a line item entry to the balance sheet. Add this entry for the period under "Assets." Using this method also results in higher income and lower cost of goods sold for the period on the income statement. The inventory value using the FIFO method results in an inventory with a current up-to-date value.

2. Calculate the inventory balance by using the last-in-first-out or LIFO method of inventory calculation. In the inventory account, the newest inventory sells first, resulting in lower income and higher cost of goods sold on the income statement. Adjust the inventory account by debiting the account as inventory sells for the period with the most current inventory value. Credit the inventory account with new inventory at the most current inventory value as created and put into inventory for the period. Take the balance between these adjustments or the ending balance for the inventory account, and add it to the balance sheet under "Assets." The inventory balance using the LIFO method represents inventory with a much older and lower value.

3. Average the cost of inventory to calculate the ending balance amount to add to the balance sheet. Using the weighted average cost method, average the inventory value across all inventory for a specific period. Debit and credit the inventory account with the average cost for the period, as sales occur and inventory is produced, and use the ending balance on the balance sheet under "Assets."

Tips & Warnings

• Don't mix and match inventory methods when accounting for inventory. Choose one method and stick to it to ensure proper comparison and accurate financial reporting.

• The Internal Revenue Service uses the FIFO method for calculating inventory. Be prepared to explain if your method is different in financial and income tax reports.

References

• Financial Education: Inventory Accountin Methods: LIFO, FIFO, Weighted Average and gSpecific Identification
• Learn Financial Accounting: Inventory
• Middle City: Merchandising Activities

Resources

• DWMBean Counter: Bean Counter's Accounting and Bookkeeping "Cheat Sheet"
• Finance Blog: Balance Sheet Picture