Product costs are initially accounted for as inventory and ultimately transferred to the (balance sheet/income statement) when the product is .
Question
Product costs are initially accounted for as inventory and ultimately transferred to the (balance sheet/income statement) when the product is .
Solution
Product costs are initially accounted for as inventory, which is an asset on the balance sheet. When the product is sold, these costs are transferred to the income statement as cost of goods sold (COGS). Here are the steps:
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When a company purchases or manufactures inventory, the costs associated with these products are recorded as an asset on the balance sheet under 'Inventory'.
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When these products are sold, the costs associated with the sold products are removed from 'Inventory' on the balance sheet.
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These costs are then recorded on the income statement under 'Cost of Goods Sold'. This is an expense that is subtracted from Revenues to calculate Gross Profit.
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The transfer from the balance sheet to the income statement reflects the fact that the company has now used these assets (the inventory) to generate revenues.
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