RAW MATERIALS

Raw materials are materials or substances used in the primary production or manufacturing of goods. Raw materials are commodities that are bought and sold on commodities exchanges worldwide. Traders buy and sell raw materials in what is called the factor market because raw materials are factors of production as are labor and capital.

Raw materials are used in a multitude of products. They can take many different forms. The kind of raw materials inventory a company needs will depend on the type of manufacturing they do. For manufacturing companies, raw materials inventory requires detailed budgeting and a special framework for accounting on the balance sheet and income statement. Manufacturing companies take special steps to account for raw materials inventory. This includes three distinct inventory classifications on their balance sheet compared to just one for non-manufacturers. The current assets portion of the balance sheet for manufacturing companies will include:

• Raw materials inventory

• Work-in-process

• Finished goods

All inventory, including raw materials inventory, should be valued at its comprehensive cost. This means its value includes shipping, storage, and preparation. The typical journal entries in an accrual accounting system for the initial purchases of raw materials inventory include a credit to cash and a debit to inventory. Debiting inventory increases current assets and crediting cash will reduce cash assets by the inventory amount.

When a company uses raw materials inventory in production, it transfers them from the raw materials inventory to the work-in-process inventory. When a company completes its work-in-process items, it adds the finished items to the finished goods inventory, making them ready for sale.