Raw materials definition
/What are Raw Materials?
Raw materials are the constituent parts input into a production process, where they are transformed into finished goods. Most raw materials are highly standardized, and so can serve as inputs into multiple products. Since raw materials can be damaged or become obsolete, and require working capital funding to hold, organizations try to keep only a modest amount of raw materials on hand.
Accounting for Raw Materials
Raw materials are tracked in a separate inventory account at their historical cost. For example, a $4,000 purchase of raw materials on credit would be recorded with the following journal entry:
If their market value declines prior to being used, their recorded cost is written down to market value (known as the lower of cost or market rule).
Presentation of Raw Materials
Raw materials are expected to be used within one year, and so should be presented on the balance sheet within the current assets section. Many businesses consolidate all forms of inventory into a single line item, so the raw materials number may be included in this aggregated figure.