> ## Content Index
> Fetch the complete content index at: https://abundance.alloconomy.com/llms.txt
> Use this file to discover other available public pages before exploring further.

# When Inventory and Equipment Become Expenses
- URL: https://abundance.alloconomy.com/alloconomy/close-06-cost-becomes-expense/
- Published: 2026-10-28T19:39:22.000Z
- Updated: 2026-10-28T19:39:22.000Z
- Description: Trace cost of sales, depreciation, inventory shortages and write-downs.
- Author: Sathya Narayanan
- Tags: Alloconomy, Accounting, Month-End Close, #series-detail, #Import 2026-10-28 12:29

Accounting · Month-End Close

## How profit earns credibility

1. Part 1[The five-question cheat sheet](https://abundance.alloconomy.com/alloconomy/month-end-close/)Understand why the unclosed profit is provisional and what makes a reviewed result credible.
2. Part 2[Profit, equity and cash](https://abundance.alloconomy.com/alloconomy/close-02-why-profit-changes-equity/)Trace close adjustments into their supporting balances, then reconcile profit, equity and cash.
3. Part 3[Choose the right period](https://abundance.alloconomy.com/alloconomy/close-03-which-month/)Use promises, delivery and payment rights to separate this month from the next.
4. Part 4[Find missing costs](https://abundance.alloconomy.com/alloconomy/close-04-before-the-invoice/)Accrue completed work, reconcile the eventual invoice and avoid counting the same cost twice.
5. Part 5[Apply the recognition rules](https://abundance.alloconomy.com/alloconomy/close-05-expense-or-asset/)Distinguish spending from expense and identify the resource that qualifies to remain as an asset.
6. Part 6**Follow consumption and loss**Current essayTrace cost of sales, depreciation, inventory shortages and write-downs.
7. Part 7[Make judgment reviewable](https://abundance.alloconomy.com/alloconomy/close-07-estimates/)Support credit losses and other estimates, and distinguish new information from errors.
8. Part 8[Test the evidence](https://abundance.alloconomy.com/alloconomy/close-08-reconciliation/)Connect the ledger to banks, subledgers, schedules and evidence beyond the accounting system.
9. Part 9[Define the reporting boundary](https://abundance.alloconomy.com/alloconomy/close-09-organization-profit/)Understand group eliminations, currency, tax and the different levels of profit.
10. Part 10[Close the complete example](https://abundance.alloconomy.com/alloconomy/close-10-one-month-closed/)Reconcile every adjustment to the income statement, balance sheet, equity and cash flow.

The previous essay established why a cost can enter the balance sheet. This month-end task asks whether it still belongs there at the same amount.

Maya needs more than a list of purchases. Stories Inc.'s close team must explain how opening inventory and equipment became the closing balances: what arrived, what left, what was consumed and what lost value. Accountants often call that movement schedule a *rollforward*.

## Reconcile the books held for sale

Our fictional October inventory schedule begins with $20,000\. Receipts add $18,000, and the recorded cost of books actually sold is $24,000.

| Inventory movement            | USD         |
| ----------------------------- | ----------- |
| Opening inventory             | $20,000     |
| Purchases received            | +$18,000    |
| Cost of books sold            | −$24,000    |
| Inventory before close review | **$14,000** |

The accountant ties receipts and sales movements to the stock records, then connects their totals to the general ledger. The $5,000 prematurely billed sale elsewhere in our example has not removed any inventory cost: those undelivered books remain on hand. The schedule follows the actual entries rather than assuming that every revenue correction requires another cost adjustment.

IAS 2 connects sold inventory's expense with the period of the related revenue. It also requires attention to the value of inventory still held. [IAS 2: Inventories](https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/?ref=abundance.alloconomy.com)

## Investigate the count difference before recording a loss

A physical count does not arrive as a complete accounting answer. The team first checks which locations and goods it covers, whether the count and ledger use the same cut-off, and whether receipts or dispatches around the count have been recorded. Goods owned but held elsewhere, or somebody else's goods in the warehouse, need appropriate treatment too.

An unrecorded movement can look like a shortage. Counting the same shelf twice can hide one. The warehouse team investigates differences while the accountant traces their financial effect.

For this case, the investigation confirms a genuine **$500 shortage**. Stories Inc. records an inventory loss and reduces inventory by $500\. No sales revenue appears: missing books have not become a customer sale.

## Build the write-down instead of guessing it

Other books are physically present but expected to recover less than their recorded cost. The affected stock is a batch of identical copies of one edition, in the same condition with the same expected per-copy proceeds and selling costs. It remains after the shortage has been removed. The close team totals the same item-level comparison across those copies:

| Valuation of the affected inventory group | USD        |
| ----------------------------------------- | ---------- |
| Recorded cost                             | $4,000     |
| Expected selling proceeds                 | $2,800     |
| Necessary selling costs                   | −$300      |
| Net realizable value                      | **$2,500** |
| Required write-down                       | **$1,500** |

The books need no further completion work in this example. The assumed proceeds and selling costs would need real support, such as current selling prospects and the costs necessary to complete those sales. They are teaching assumptions, not observed market figures.

This is the calculation behind the existing $1,500 adjustment, not an extra loss. The affected group excludes the missing books. Stories Inc.'s final inventory is therefore **$14,000 − $500 − $1,500 = $12,000**.

A count establishes quantity; a valuation review addresses recoverability. Both are needed. Under the IFRS inventory rules used here, required write-downs and losses become expenses. Other frameworks have differences, so a real close applies the entity's own requirements.

## Update the equipment register before running depreciation

Equipment has a different movement schedule. The accountant checks additions against purchase and receipt records, obtains the date each asset became available for use, identifies disposals, and reconciles the register with the general ledger. The people using the equipment supply facts that an invoice cannot: whether it is installed, abandoned, damaged or replaced.

Once the register is current, the team runs the applicable depreciation calculation and reviews its output. Otherwise, an automated routine can confidently depreciate an asset that has been disposed of or omit one newly brought into use.

Stories Inc.'s new $12,000 office equipment was available for the whole of October. The case assumes straight-line depreciation over sixty months with no residual value:

**$12,000 ÷ 60 = $200 for October.**

The older equipment's established schedule contributes $400\. Total depreciation is **$600**. There are no disposals or equipment impairments in this case.

| Equipment rollforward            | Gross cost  | Accumulated depreciation |
| -------------------------------- | ----------- | ------------------------ |
| Opening balance                  | $24,000     | $4,000                   |
| October additions / depreciation | +$12,000    | +$600                    |
| Closing balance                  | **$36,000** | **$4,600**               |

Net equipment is **$31,400**. Accumulated depreciation records cost allocated to date; it is not a replacement-funding account.

## Check where the charge belongs

Depreciation allocates depreciable cost; it is not a monthly appraisal. IAS 16 begins depreciation when an asset is available for its intended use. Payment date alone does not establish that point. [AASB 116, incorporating IAS 16, paragraphs 50–60](https://standards.aasb.gov.au/aasb-116-dec-2022?ref=abundance.alloconomy.com)

Our office equipment's charge goes into October expense. Production equipment can be different: its depreciation may form part of inventory cost and reach expense when the resulting goods are sold. [AASB 116, paragraphs 48–49](https://standards.aasb.gov.au/aasb-116-dec-2022?ref=abundance.alloconomy.com) The destination of the charge is another part of the close, not merely a software setting to inherit without review.

The team also looks for new information affecting useful lives, residual values or possible impairment. That does not require a fresh valuation of every asset every month. It requires changes in the business to reach the accounting process so the applicable review and measurement requirements can be met.

For Maya, the completed schedules explain both the numbers and their operational causes. Selling books, losing books, reducing expected selling proceeds and consuming equipment are four different events. The close should preserve those distinctions so she can decide what needs attention.

---

[← Apply the recognition rules](https://abundance.alloconomy.com/alloconomy/close-05-expense-or-asset/) | [Make judgment reviewable →](https://abundance.alloconomy.com/alloconomy/close-07-estimates/)

*Fictional teaching example. Personal views based on public sources; no confidential employer information or employer endorsement. Accounting policies and business circumstances require case-by-case analysis.*