IFRS Inventory Accounting: Recording Free Inventory and Owner Consumption

Under International Financial Reporting Standards (IFRS), the accounting treatment for free inventory received and inventory consumed by owners involves recognizing the inventory at its fair value upon receipt and recording the consumption appropriately. This article will guide you through the necessary journal entries and considerations when handling these scenarios.

Recording Free Inventory Received

When free inventory is received, it needs to be recognized at its fair value on the financial statements. This involves two key journal entries:

Journal Entry for Free Inventory Received

Dr Inventory at Fair ValueXXXX
Cr Revenue or Other IncomeXXXX

Explanation: This entry increases your inventory asset on the balance sheet and recognizes the income from receiving the inventory. Depending on the context, you may record this in a different income account.

Recording Inventory Consumed by Owners

When inventory is consumed by owners, such as for personal purposes, it is important to recognize this consumption as a reduction in inventory and potentially as a distribution of earnings or an expense. The appropriate journal entries for this are:

Journal Entry for Inventory Consumed by Owners

Dr Drawings/Equity Distribution or ExpenseXXXX
Cr InventoryXXXX

Explanation: This entry reflects the value of the inventory taken by the owners, which reduces their equity in the business. It also decreases your inventory asset on the balance sheet.

Summary

When recording free inventory received, the inventory is recorded at its fair value as an increase in inventory, and the income is recognized. Inventory consumed by owners is recorded as a reduction in inventory and might be recognized as a withdrawal or expense, depending on the context.

Note: Always ensure that the accounting treatment aligns with the specific circumstances. Consulting an accounting professional for tailored advice is highly recommended.

Keywords: IFRS, Inventory Accounting, Free Inventory, Owner Consumption