Rules for accounting for inventory

1. Group of inventory accounts is used to record existing value and changes in inventory of the enterprise (if the enterprise accounts for inventory using regular declaration method) or record value of inventory in the opening or closing tax period (if the enterprise accounts for inventory using periodical declaration method).
2. Inventory of the enterprise is assets bought for production or sale in an ordinary course of business, including:

- Goods in transit;

- Raw materials, materials; tools;

- Unfinished goods;

- Commercial products, goods; consignments;

- Goods stored in tax-suspension warehouse of the enterprise. With regard to unfinished goods, if their period of production or circulation exceeding a normal business cycle, they shall not be recorded to inventory in the balance sheet, but shall be recorded to long-term assets. With regard to equipment and spare parts for replacement whose preserve period is more than 12 months or more than an ordinary course of business, they shall not be recorded to inventory in the balance sheet, but shall be recorded to long-term assets.

3. The goods, materials, assets under agreement on keeping, deposit, import-export trust, processing,...which are not under ownership and control of the enterprise shall not be recorded to inventory.
4. Accounting for inventory must comply with regulations on Vietnamese accounting standard (VAS) ―Inventory‖ when determining original prices of inventory, method for calculation of value of inventory, determination of net realizable value, making provision against devaluation of goods in stock and recording costs.
5. Rules for determination of original prices of inventory are applied specifically to every type of materials, goods, according to sources and time in which the prices are determined
6. Non-refundable taxes which are recorded to value of inventory include: non-deductible input VAT on inventory, Special excise duty, import tax, environmental protection tax payable when buying inventory.
7. When buying inventory, if goods, equipment or spare parts for replacement are attached (provision for breakdown), the changeable goods, equipment or accessories shall be recorded according to fair value. The value of purchased goods shall equal total value of purchases goods minus (-) value of changeable goods, equipment or spare parts for replacement.
8. When selling inventory, the original prices of sold inventory shall be recorded to production cost within a tax period in conformity with relevant revenues which are recorded and in conformity with their nature of transactions. When releasing inventory for promotion or advertisement, the rules below shall be followed:

a) If the inventory are released for promotion or advertisement without collecting money, providing additional conditions (compulsory purchase of goods, etc), the value of inventory shall be recorded to selling expenses (goods for promotion or advertisement for detail);

b) If the inventory are released for promotion or advertisement with additional conditions that the customers are required to buy goods (e.g. buy two, get one free, etc) The collected amounts shall be allocated to revenues from complimentary products, the value of complimentary products shall be included in their cost (nature of transaction is sale rebates).

9. When determining value of closing inventory, the enterprise applies one of following methods:

a) Specific identification method: Specific identification method shall be applied according to actual value of every purchased good or every sold good, so that it is only applied to enterprises having a few items of products or stable and identifiable goods.

b) Weighted average method: value of every inventory item shall equal mean value of each opening inventory item and value of each inventory item sold or produced in current period. Mean value may be calculated in every period or after import consignment, depending on specific conditions of every enterprise.

c) First in, first out method (FIFO): This method assumes that inventory purchased or manufactured first is sold first and newer inventory purchased or manufactured near the end of the accounting period remains unsold. According to this method, value of inventory sold shall apply prices of purchased inventory at or near the beginning of the accounting period; value of closing inventory shall apply prices of purchased inventory at or near the end of accounting period. Every inventory costing method has their certain advantages and disadvantages. The accuracy and reliability of every method bases on management requirements, standards, professional competence and calculating equipment or means of information processing of the enterprise. And bases on preservation requirements, complexity of types, specifications and fluctuation of materials or goods of the enterprise.

10. Regarding inventory purchased in foreign currencies, value of received inventory shall base on actual exchange rates at the arising time (if the seller is received an advance, the value of received inventory shall be equivalent to the advance exchange rates. Import duty payable shall be determined according to exchange rates for calculation of import duty provided by customs authority as prescribed. Accounting for exchange differences shall comply with regulations of Article 69 – Guidelines for accounting method for exchange rate differences.
11. At the end of the accounting period, if the inventory value is not recovered enough due to damage or out of fashion, decrease in selling prices or increase in cost of improvement or selling expenses, a decrease in original prices of inventory shall be recorded leading the equal between the original cost and net realizable value of inventory. Net realizable value is selling price of inventory estimated in an ordinary course of business minus (-) estimated cost of product improvement or cost of consumption.

The decrease in original prices of inventory leading the equal between the original cost and net realizable value shall be covered by provision against devaluation of inventory. The provision against devaluation of inventory is the positive difference between original cost and net realizable value of inventory. All differences between provision against devaluation of inventory made at the end of this accounting period must be greater than provision made at the end of previous accounting period, the deficiency or losses of inventory shall be recorded to production cost in the period after minus (-) compensation of individual or unallocated factory overhead. All differences between provision against devaluation of inventory made at the end of this accounting period must be greater than provision made at the end of previous accounting period, the deficiency or losses of inventory shall be recorded to production cost in the period after minus (-) compensation of individual or unallocated factory overhead.

12. Inventory value and inventory in kind must be specifically accounted for every kind, specification of goods or materials, management and use place, ensure the conformity between actual materials or goods and general ledger and ledger.
13. An enterprise (an accounting unit) may only apply one of two accounting methods for inventory: perpetual inventory system, periodic inventory system. The accounting method for inventory shall be selected at the enterprise according to characteristics, quantity, types of materials or goods and management requirements and in the accounting period.

  Accounting methods for inventory.

a) Perpetual inventory system: Periodic inventory system is a method monitoring and keeps up-to-date inventory records to account for additions to, subtractions from or balance of inventory on the accounting records. When applying perpetual inventory system, inventory accounts shall be used to record current amounts, increase or decrease in materials or goods. Therefore, value of inventory on accounting record may be determined at any time in the accounting period. At the end of accounting period, the physical inventory count shall be compared with inventory data in ledger. In principle, the actual inventory data must conform to inventory data in ledger. If there is any difference, it is required to uncover reasons and provide solutions. The perpetual inventory system is usually applied to manufacturing enterprise (industry, construction, etc) And commercial enterprises dealing in high value items such as machinery, equipment, engineering goods, high quality , etc.

b) Periodic inventory system: The periodic inventory system shall be used to update the ending inventory balance in the general ledger according to the physical inventory count and calculate cost of goods or materials sold following the formulary below:  

  - According to periodic inventory system, any changes in materials or goods (additions to or subtractions from inventory) shall not be recorded to inventory accounts. Value of materials or goods purchased and added to inventory in the period shall be recorded to a separate account (account 611 “Purchases”).

- The physical inventory count and determination of cost of goods or materials sold (for production or for sale) shall be conducted at the end of accounting period and used as the basis for accounting of account  611 “Purchases”. When applying periodic inventory system, inventory accounts shall only used at the beginning of the accounting period (for transfer of opening balance) and at the ending of the accounting period (for recording actual ending inventory).

- This method is usually applied to enterprises trading in multiple types of goods or materials with different specification or models, low value, and those goods or materials are regularly sold for use or sale (retail outlets, etc). This method is simple and easy for accounting. But the accuracy of materials or goods sold is affected by the management of warehouses, depot.  

Source: Circular 200