A raw materials inventory is the amount of raw materials that are in the possession of the owner during a specific accounting period. The assessment of this type of inventory may occur at the beginning of the period or at the end. Identifying the beginning and ending balance of the inventory during the period can help identify the amount of usage of raw materials that occurred during the period, and thus influence the process of ordering those materials for future periods.
As with most types of inventories, the maintenance of a raw materials inventory is essential to the continued operation of any type of manufacturing operation. Ideally, the business will find the perfect balance between having enough materials on hand to maintain the most efficient rate of production, while also keeping the inventory as low as possible, thus reducing the amount of taxes that are assessed on the inventory. In order to accomplish this goal, monitoring the receipt and issuance of materials from that inventory is essential.
In terms of maintaining the accounting records of a raw materials inventory, new shipments of materials received are noted as a debit in the records. When any of the raw materials are issued from the inventory, most often for use in the manufacturing process, this disbursal is noted as a credit, thus decreasing the total number of units and the general worth of the inventory. Many companies record these debits and credits to the raw materials inventory on a real-time basis, although it is still customary in some businesses to record the transactions on a daily or even a weekly basis.
Structuring the ordering process helps to keep the raw materials inventory at a level where there is enough to support the continued operation of the plant, but not so much that a significant amount of the inventory remains untouched for extended periods of time. By monitoring how frequently materials are issued from the existing inventory, and comparing that with how long it takes for the supplier to process and deliver a new order of raw materials, it is possible to establish specific guidelines for placing orders in a timely manner. Continual monitoring of the inventory makes it possible to adjust the frequency and size of those orders so the inventory is kept within reasonable size, thus eliminating the need to pay additional taxes on an inflated inventory. While this process was once done manually, modern inventory software can easily be configured to track the activity within the inventory and automatically place orders when and as necessary.