How to Account for Parts That Are Often Consumed Immediately in the Course of Business
Accounting is a business activity that records and reports business transactions to a variety of stakeholders. Providing accurate financial records allows a company's management team to make informed business decisions. External stakeholders can measure how well a company operates by efficiently using resources. Parts consumed immediately by a business may be a cost or expense. Accountants must identify the expenditure's classification prior to recording the entry into the general ledger. Failure to do so can result in material misstatements in a company's accounting reports.
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Instructions
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Review the documentation associated with the purchase. Parts used to produce inventory are part of direct materials or manufacturing overhead. Parts for maintaining normal business operations are an expense.
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Begin writing a journal entry to record the transaction into the general ledger. For inventory parts, debit either direct materials or manufacturing overhead; credit cash or accounts payable, depending on how the company paid for the items. For an expense, debit an account called parts expense; the credit side will remain the same.
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Include the account number, account name, dollar amount and brief description of the transaction's purpose. Include a copy of all requisite documents with the entry as support.
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Enter the journal entry into the general ledger. For a computerized accounting program, follow the standard procedure for entering the entry. Manual accounting ledgers simply require a handwritten entry to record the transaction.
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Tips & Warnings
Insight from the individual who requested the parts may be necessary to determine its classification. A quick review of the internal purchase order should provide information on who ordered the goods and how to record the entry, i.e. as inventory parts or as a general expense.
