Understand Inventory Accounting

There are three types of inventory/ stock in an organization.

Raw Material Inventory
Finished goods
Consumables

Raw material inventory is used to manufacture finished goods.
Finished goods inventory is held for sale.
Work In Process: Semi Finished goods.

lets take a scenario of Potato Chips Factory;

Raw Material : Potatoes, Vegetable Oil
Finished goods: Potato Chips
Work in process: Potato chips peeled and half fried

Accounting Entries:

Purchase of Raw material:

Raw Material Inventory   DR
Bank/ Cash                       CR

Work In Process:

Work In Process             DR
Raw material Inventory CR

Finished Goods

Finished Goods              DR
Work In Process            CR