Bookkeeping of inventory may be determined in two different ways:
(1) By reducing the purchases figure on account of every sale using the cost (purchase) price of item sold.
(2) By counting inventory items remaining in the shop and determining their cost.
Though inventory value may be determined quite regularly during the year, however; it is usual for the business to determine its value only at the end of accounting year through physical inventory take. This value is then recorded in inventory account and in income statement.
Why inventory account does not include purchases and sales of goods?
Inventory level may increase due to both purchase and return inwards and decrease due to both sale and return outwards. In order to distinguish the two reasons for increase and decrease in inventories, we normally use four independent accounts named above instead of having only one inventory account.
Businesses, in order to earn profit, do not sell goods at the same price at which they were purchased. Therefor, separate accounts are maintained for purchases and sales.
From the above discussion, we may infer that when business involves in a transaction relating to inventory of goods then this is not passed through a single inventory account rather we use different accounts to record the transactions relating to movements in inventory items. These accounts, may include; purchases, sales, return inwards and return outwards accounts.