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ctcLink Accounting Manual | 40.35 Inventories and Prepaid Expenses

40.35 Inventories and Prepaid Expenses

2022-06-30

40.35.10 Expenditure Recognition

Under full accrual accounting, expenditures are recognized as soon as a liability is incurred regardless of the timing of related cash flows. However, under the modified accrual basis, GAAP provided modifications to the general rule in the areas of inventories and prepaid items.

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Governments may initially report inventories and prepaid items they purchased as an asset and defer the recognition of the expenditure until the period the inventories and prepaid items are actually consumed or used.

Under the purchases method inventories and prepaid items are reported as expenditures when purchased rather than capitalized as an asset in governmental funds.

40.35.20 Inventory - State Requirements

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The district president/chancellor must designate, in writing, one or more employees to be responsible for maintaining and safeguarding the district's inventories. These responsibilities include:

  1. Selecting appropriate inventory accounting methods and systems from acceptable alternatives (refer to Subsection 40.35.10.2 and 40.35.10.3);
  2. Developing and implementing policies and procedures to safeguard, control, and account for inventories;
  3. Defining inventory control point in the agency's written internal policies;
  4. Planning, conducting, and reconciling the physical inventory with inventory records;
  5. Documenting selected inventory valuation methods;
  6. Documenting physical inventory procedures; and
  7. Performing other duties necessary to account for and report inventories.

The state allows colleges to use any of three valuation methods:

  1. First-in, First-out (FIFO) - This method allocates costs on the assumption that goods are consumed/sold in the order in which they were acquired. In other words, the first goods purchased are assumed to be the first used or sold. Thus, inventory on-hand is assumed to represent the most recent acquisitions.
  2. Last-in, First-out (LIFO) - This method allocates costs on the assumption that the last units acquired are the first units consumed/sold. Thus, inventory on-hand is assumed to come from earlier acquisitions.
  3. Weighted Average (W.A.) - In general, this method values ending inventory based on the average cost per unit for the period.

Consumable merchandise, raw materials or work in progress inventories must be physically counted, valued, and recorded in the general ledger when the fiscal year-end balance on-hand at an inventory control point exceeds $50,000.

The state allows colleges to use either of two inventory systems:

Perpetual Inventory System

This method uses the inventory quantities and values for all purchases and issues are recorded directly in the inventory system as they occur. Perpetual inventory system balances are verified by means of periodic physical counts. A revolving physical count, where segments of inventories are counted at different times, may be used, provided all inventories are counted at least every other fiscal year.

The agency inventory officer is responsible for developing and implementing procedures for recording inventory additions as received and reductions as used.

Periodic Inventory System

This method avoids the necessity of accounting for each addition to and deletion from inventory. Instead, the agency performs a physical count of its inventory at least annually at fiscal year-end. It then costs the inventory according to generally accepted accounting principles and adjusts the accounting records to reflect this cost. When this system is used, the agency must maintain a system for documenting the inventory unit costs used in determining the cost.

  1. If possible, physical inventory counts should be performed by persons with no direct responsibility for the inventory.  If that is not possible, then the inventory counts must be spot-checked by a person with no direct responsibility for the inventory.
    Physical inventory instructions must be documented and distributed to individuals involved in the physical count.
  2. Perpetual inventory records must be reconciled with the physical count. The district must investigate and explain differences, take corrective action when necessary, and adjust the accounting records. When the reconciliation is complete, the college inventory officer must certify in writing that the inventory was verified by counting and reconciliation.
  3. Under the periodic inventory system, the physical inventory listing resulting from the physical count constitutes adequate documentation of the inventory. After the count is complete, the process is one of calculation rather than reconciliation.
    The inventory units are to be assigned a cost according to the method selected, the total cost of the inventory is to be calculated, and the appropriate accounting adjustments are to be made.
  4. The district inventory officer must certify in writing that the inventory was verified by an actual count.
The inventory reconciliation and certification must be retained by the district as documentary support for its inventory. The district should retain this documentation in accordance with community and technical college system approved records retention schedules.

40.35.30 Accounting for Consumable Inventories

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Consumable inventories are those supplies or materials consumed daily in the course of a college's business. Some examples would be supplies on hand, supplies in central storerooms, supplies under the control of a central storeroom, or supplies for subsequent use in operations. Office items, such as pens, highlighters, printer ink and paper, are common examples of supplies used by colleges.

40.35.30.2.a Periodic Inventory Purchases

Purchases of consumable inventories during the year are recorded by debiting account 5030010 Supplies and crediting AP liability 2000010.

Fund 146 will be used in the examples below.  In theory, any non-appropriated governmental fund might be used for record inventories.

Illustrative Entries

Record Purchase
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd PO/AP - Voucher Exp 5030010  
146 1cc ddddd PO/AP - Voucher Liab   2000010
Record Payment
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd AP - Payments Liab 2000010  
146 1cc ddddd AP - Payments Cash   1000070

40.35.30.2.b Periodic Inventory Use

No entry is required to record the use of consumable inventories during the year.

40.35.30.2.c Periodic Inventory Annual Adjustment

An annual adjustment is recorded to reflect the actual inventory balance as determined by a physical inventory count. For increases in consumable inventory, a debit to Consumable Inventory (1030010) is recorded and a decrease to Supplies (5030010).  An opposite entry is recorded for a decrease in inventory.

Illustrative Entries

Record Inventory Increase
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry Inv 1030010  
146 1cc ddddd Journal Entry Exp   5030010
Record Inventory Decrease
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry Exp 5030010  
146 1cc ddddd Journal Entry Inv   1030010

40.35.30.2.d Periodic Inventory Adjustment

In governmental funds it is also required to adjust the non-spendable portion of fund balance. The balance 3100191 must equal the total of all inventory accounts (1030010-40) at year end This is not required for proprietary funds.

Illustrative Entries

Equity Adjustment for Inventory Increase
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry AFB1 3100160  
146 1cc ddddd Journal Entry NSCI2   3100191
Equity Adjustment for Inventory Decrease
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry NSCI1 3100191  
146 1cc ddddd Journal Entry AFB12   3100160

1 Assigned Fund Balance

2 Non-Spendable Consumable Inventories

40.35.30.3.a Perpetual Inventory Purchases

Purchases of consumable inventories during the year are recorded by debiting account 1030010 Consumable Inventories and crediting AP liability 2000010.

Illustrative Entries

Record Purchase
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd PO/AP - Voucher Inv 1030010  
146 1cc ddddd PO/AP - Voucher Liab   2000010
Record Payment
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd AP - Payments Liab 2000010  
146 1cc ddddd AP - Payments Cash   1000070

40.35.30.3.b Perpetual Inventory Use

To record the use of consumable inventories during the year.

Illustrative Entries

Record Inventory Use
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry Exp 5030010  
146 1cc ddddd Journal Entry Inv   1030010

40.35.30.3.c Perpetual Inventory Year-End Adjustments

An adjustment may be required to reflect the actual ending inventory balance as determined by performing a physical inventory count.

If Inventories increased, the adjusting entry is recorded by debiting the account 3100160 and crediting account 3100191 for the increase and is reversed in inventories decreased.

The balance in account 3100191 must equal the balance in inventory accounts 1030010-40.

Illustrative Entries

Record Inventory Adjustment to Actual
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry Exp 5030010  
146 1cc ddddd Journal Entry Inv   1030010
Equity Adjustment for Inventory Increase
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry AFB1 3100160  
146 1cc ddddd Journal Entry NSCI   3100191
Equity Adjustment for Inventory Increase
Fund Class Dept Method   Acct DR Acct CR
146 1cc ddddd Journal Entry NSCI2 3100191  
146 1cc ddddd Journal Entry AFB1   3100160

1 Assigned Fund Balance

2 Non-Spendable Consumable Inventories

40.35.40 Accounting for Merchandise Inventory – Proprietary Fund Types

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Merchandise inventory is defined as assets for sale or resale to other state agencies, other governmental entities, or the public.  Inventory includes items a college produced (e.g,, wine) or purchased from vendors or distributors. Inventory may also refer to the raw materials (e.g. grapes, hops, steel pipes, etc.) the college uses to manufacture the goods it sells.

40.35.40.2.a Periodic Inventory Purchases

Purchases of merchandise inventories during the year are recorded by debiting a Cost of Goods Sold account (5030130-5030210) and crediting AP liability 2000010.

Illustrative Entries

Record Purchase
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd PO/AP - Voucher COGS 5030xxx  
4-5xx 2cc ddddd PO/AP - Voucher Liab   2000010
Record Payment
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd AP - Payments Liab 2000010  
4-5xx 2cc ddddd AP - Payments Cash   1000070

40.35.40.2.b Periodic Inventory Use

To record the sale of merchandise inventories when the merchandise inventory purchase is recorded as an expense.

Illustrative Entries

Record Inventory Use/Sales
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd AR/Billings AR 1010020  
4-5xx 2cc ddddd AR/Billings Rev   4010020
Record Cash Receipt
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd AR/Billings Cash 1000070  
4-5xx 2cc ddddd AR/Billings AR   1010020

40.35.40.2.c Periodic Merchandise Inventory Adjustment

To record the adjustment for merchandise inventory when the physical count shows the inventory value greater than the amount in the general ledger control account merchandise Inventory (1030030) and an offset to Cost of Goods Sold (5030130-210).

This entry is reversed when the physical count shows the inventory value less than the recorded amount.

Illustrative Entries

Record Inventory Use
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd Journal Entry Inv 1030030  
4-5xx 2cc ddddd Journal Entry COGS   5030xxx

40.35.40.3.a Perpetual Inventory Purchases

Purchases of merchandise inventories during the year are recorded by debiting an inventory account (1030030) and crediting AP liability 2000010.

Illustrative Entries

Record Purchase

Fund

Class

Dept

Method

 

Acct DR

Acct CR

4-5xx

2cc

ddddd

PO/AP - Voucher

Exp

1030030

 

4-5xx

2cc

ddddd

PO/AP - Voucher

Liab

 

2000010

Record Payment

Fund

Class

Dept

Method

 

Acct DR

Acct CR

4-5xx

2cc

ddddd

AP - Payments

Liab

2000010

 

4-5xx

2cc

ddddd

AP - Payments

Cash

 

1000070

40.35.40.3.b Perpetual Inventory Use/Sales

To record the use/sale of merchandise inventories when the merchandise inventory purchase is recorded as an asset.

Illustrative Entries

Record Inventory Use/Sales
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd AR/Billings AR 1010030  
4-5xx 2cc ddddd AR/Billings Rev   4010020
Record Payment
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd AR/Billings Cash 1000070  
4-5xx 2cc ddddd AR/Billings AR   1010020
Adjust Inventory
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd Journal Entry COGS 5030xxx  
4-5xx 2cc ddddd Journal Entry Inv   1030030

40.35.50 For Future Use

40.35.60 Prepaid Expenses

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Prepaid expenses are those certain types of supplies and/or services (not inventory) that are acquired or purchased during an accounting period but not used or consumed during that accounting period. In Washington, because goods and services generally must be received prior to payment, prepaid expenses will be limited.

Examples of prepaid expenses that may be acquired include insurance, maintenance services contracts, Washington State Good to Go toll accounts, and postage, books, and periodicals.

Since the state of Washington requires the receipt of goods prior to payment (with exceptions noted below), prepaid expenses are not allowed in state allocated funds (001, 24J, 060, etc).

In other governmental funds, prepaid expenses are generally accounted for using the purchases method. Under the purchases method, prepaid expenses are treated as expenditures when purchased rather than accounted for as an asset.

Under state regulations, major exceptions include college payment for equipment maintenance services up to 5 years in advance and up to 3 years for subscriptions.

40.35.60.3.a Accounting for Acquisition of Prepaid Assets

In these fund types, prepaid expenses are initially recorded as assets and the portion of supplies or services consumed or used during a period is recorded as an expense.

Illustrative Entries

Record Purchase
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd PO/AP - Voucher PPE 1040010  
4-5xx 2cc ddddd PO/AP - Voucher Rev   2000010
Record Payment
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd AP - Payments Liab 2000010  
4-5xx 2cc ddddd AP - Payments Cash   1000070

40.35.60.3.b Accounting for Consumption of Prepaid Assets

The portion of supplies or services consumed or used during a period is recorded as an expense with a reduction in the prepaid expense.

Illustrative Entries

Record Usage
Fund Class Dept Method   Acct DR Acct CR
4-5xx 2cc ddddd Journal Entry Exp 5xxxxxx  
4-5xx 2cc ddddd Journal Entry PPE   1040010

 

 


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Last Modified: 3/1/24, 4:12 PM

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