How should opening inventory be recorded in double entry accounting?

Opening inventory should be recorded as a debit to the Inventory account on the Statement of Financial Position (SFP) and a credit to the Inventory account in the Statement of Profit or Loss (SPL) to reflect the allocation of inventory costs accurately.

When a business begins a new accounting period, it needs to recognize the inventory it has on hand at the start of that period. This is achieved by increasing the inventory asset on the SFP, which is done by debiting the Inventory account. This reflects that the company has resources (inventory) available for sale.

At the same time, it is essential to reflect that this opening inventory should be accounted for in the cost of goods sold for the new period. This is done by crediting the Inventory account in the SPL. The reason for this entry is that the costs associated with the inventory will affect the cost of goods sold once the items are sold during the period, thereby linking the balance sheet (SFP) with the income statement (SPL) properly.

This transaction ensures that the financial statements provide an accurate picture of the company’s assets and expenses, adhering to the double-entry accounting principle where each transaction affects at least two accounts to maintain balance in the accounting equation.