Raw materials – What are raw materials?
Raw materials are the resources used by a company to produce its finished goods and products.
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Raw materials can be divided into two groups: direct and indirect.
- Direct materials are used within the final product. Examples include the wood used to make furniture or the fabric used to make clothing.
- Indirect materials are used throughout the production process, but are not directly included in the final product. Examples include the oils used to maintain machinery or the lightbulbs in a factory.
Raw materials and accounting
Raw materials are usually recorded on a balance sheet as an inventory asset. When recording raw materials, a debit is made to the raw materials inventory account, whilst a credit is made to the accounts payable account.
When raw materials are used, the accounting treatment varies according to whether the raw materials are direct or indirect.
For direct materials, debit the work in process inventory account and credit the raw materials inventory account. If the production process is so short that it doesn’t make sense to use a work in process account, debit the finished goods inventory instead. Once the finished goods are sold, the cost of the raw materials should be recorded in the cost of goods sold account.
For indirect materials, debit the overhead account and credit the raw materials inventory asset account. At the end of the accounting period, the balance of the overhead account is allocated to the cost of goods sold and ending inventory.
Raw materials and Debitoor
Debitoor invoicing software helps you track your business expenses and inventory assets, including raw materials. To do this, simply create a new expense, mark it as an asset, then select the category 'Inventory Purchase'. You can then choose between 'Subcontracting', 'Finished Goods' or 'Raw Materials'. It's that easy!