Introduction to Finished Goods
Finished goods refer to the products that the company have manufactured after completing all the production steps required, but they have not been sold to the customers. Most of the time, only manufacturers will use this term to categorise the inventories they have because they need to differentiate finished goods from raw materials and work-in-process. For retailers, they do not need to split their inventories into different classes because all the inventories they purchase are in the complete form.
In manufacturing companies, there are three types of inventories, which are raw materials that the company has purchased, work-in-process, which are only partially completed, as well as the finished goods. This is what makes the accounting process of manufacturing companies to be more complicated than that of the retailer. If you are running a manufacturing business, but you do not know what to do with your accounting tasks as you are not familiar with it, why don’t you consider hiring an accounting service in Johor Bahru? Managing your books of account by keeping them updated is crucial for you to stay on top of your financials (Also see The Role of Accounting In A Financial Crises), and the professionals are always there to help if you need their assistance.
Raw materials refer to the items that a company purchases to manufacture finished goods. For the products that are only partially completed, people may call it the work-in-progress. After the company has completed all the processing procedures, and the products can be distributed or used straight away, then we should call them finished goods.
Note that an item can be a seller’s finished goods, but from the buyer’s perspective, that item is a raw material. As an instance, a paper factory will buy logs as its raw material, which is what it needs to manufacture paper. Then, it will use the logs to manufacture the finished goods, which is paper. After it has produced the paper, a printing company may buy the papers from it. Now, the paper is the raw material to that printing company as it is what they will use to print books, magazines, brochures, and so on.
When the business owners who own a manufacturing business read their company’s income statement, they will see finished goods appearing as the company’s current assets (Also see How Do Assets and Equity Differ from Each Other?). This is because it is assumed that the company will sell the finished goods in a year. When an accounting period has come to an end, the accountants will combine the finished goods with all raw materials as well as work-in-process and make them into a single line item called inventory in the balance sheet of the company.
In most cases, finished goods will undergo a process called markup. This means that business owners (Also see When Will Business Owners Issue Debit Notes?) will increase their price from their original price to the price that they will sell them to the customers. The amounts of markup can be different as the price elasticity of demand can bring an impact on it.