So much overlap occurs in the world of business accounting that accountants rigidly define lines in order to keep accounts straight when it comes to financial bookkeeping. Wondering whether adjustments to inventory can go in company books as a change in owner's equity makes logical sense, because the former affects the latter. However, determining whether you can or should do this requires an understanding of standard accounting practices for owner's equity and inventory adjustments.
Owner's equity is the total value that owners, or stockholders, theoretically would receive if the company suddenly goes bankrupt. Accountants define owner's equity as the total value of a company's assets minus its liabilities. Liabilities include outstanding loans and any other obligation to make payment to a third party. Assets are anything of value that a company owns, including cash, manufacturing equipment, vehicles and property, as well as intangible assets like trademarks, patents, brands, goodwill and outstanding accounts receivable.
An inventory adjustment is the process of adjusting a company's books periodically – usually every week, month or year – to maintain an accurate book value of all inventory. This process entails calculating the total value of all inventory and comparing this value to a previous inventory value. The difference between the current and previous value of the inventory constitutes the adjustment amount. If a company adds inventory, the inventory value goes up. If a company sells inventory without replacing it, the inventory value goes down.
Inventory and Owner's Equity
Inventory is included in owner's equity because it qualifies as an asset. However, an inventory adjustment does not necessarily denote a change in owner's equity. For example, if a company purchases equipment for $5,000, it increases the value of its inventory assets by $5,000, but it must spend $5,000 to get this inventory. This expenditure constitutes a decrease in the company's cash asset value, or an increase in liabilities if the purchase is made with credit. Owner's' equity therefore remains the same, despite the inventory adjustment.
An inventory adjustment constitutes just one part of the puzzle of owner's equity. Technically speaking, you can record an inventory adjustment under owner's equity, but only if you clearly describe it as an inventory adjustment and include all other related asset and liability values. In this respect, an inventory adjustment recorded under owner's equity is one of many sub-items used to describe the total value of owner's equity. When recorded in this manner, an inventory adjustment still must be recorded in a section of the company books reserved specifically for inventory.
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