What are the two primary methods of accounting for inventory?

The two primary methods of accounting for inventory focus on how inventory costs are recognized and reported in the financial statements. These methods are crucial for determining the value of inventory on hand and the cost of goods sold, which directly impacts the profit and financial position of a business.

The consumption method is one where inventory is recorded as it is used in the production of goods or services. This approach provides an accurate reflection of inventory levels and costs based on actual consumption.

On the other hand, the purchase method records inventory at the time it is purchased, regardless of when it is used or sold. This method is more straightforward and is commonly utilized in businesses that sell goods directly to consumers.

These two methods reflect distinct approaches to managing and reporting inventory costs, which are vital for effective inventory control and accurate financial reporting. Understanding these differences helps businesses maintain proper financial records and comply with accounting standards.