A business may or may not record machinery as inventory for accounting purposes. The concept of inventory in the accounting context is used to help identify certain assets that a company expects to turn over into sales within an accounting period. For example, if machinery is purchased as a manufacturing asset or other fixed resource, it is capitalized, then treated as an expense over multiple accounting cycles. However, the expense part of the machinery can be inventoried along with other sale costs. Businesses may also buy machinery for resale purposes and treat it as normal inventory, through the use of a direct inventory account or separate purchase account.
1. Account for machinery purchased for use in manufacturing. To inventory the expense part of the machinery incurred in upcoming production, a business first calculates the depreciation expense and any manufacturing overhead costs such as maintenance and power use. The machinery depreciation expense and overhead costs are allocated to the products produced. These become part of the cost of goods sold and are recorded in the product inventory until the products are sold.
2. Inventory machinery that is for sale, if the business bought it solely for resale purposes as a machinery dealer. To record the machinery as inventory, the company would debit its machinery inventory account at the time of purchase. Over time, as the business sells the equipment, it would credit the inventory account to reduce the outstanding machinery balance. To better track inventory transactions, sub-inventory accounts may be used for machinery of different models with separate series numbers.
3. Maintain separate machinery purchase records. A business may also maintain a separate purchase account for machinery inventory. Using this method, a company doesn’t make any recording in the machinery inventory account after buying inventory. Instead, it debits the purchase account. During the accounting period, the business tracks its machinery inventory through the accumulation in the purchase account. At the end of the period, the business conducts a physical count of the inventory account. It compares the ending inventory with the beginning inventory, combined with the machinery purchased during the period. Any difference between the two represents the amount of machinery sold during the period.
Source – Small Business Chron