Products and services – Raw materials

Raw materials are essentially the different items required to build a finished product. A furniture company that builds desks could require wood, metal, nuts, bolts, and screws. These items will be required in order to manufacture the finished product.

A company may not manufacture fully from scratch, but simply purchase the component parts and assemblies only. The accounting entries are pretty much the same for either business model, or often it is a combination of the two.

Raw materials need to be created as stock items. As shown in the following screenshot, three chart of account categories are associated with a stock item. These are Stock asset account, Income account, and Expense account.

Figure 3.1 – Inventory/stock item accounts

The Stock asset account is affected when the goods are purchased. For example, the balance sheet entries could be debit stock and credit creditors.

If a customer invoice...