A company’s raw materials are the resources it uses to manufacture its finished goods and products. Raw materials are materials or substances that are used in the initial production or manufacture of goods. Raw materials are commodities that are bought and sold on global commodity exchanges.
Raw materials are typically recorded as an inventory asset on a balance sheet. When recording raw materials, a debit is applied to the raw materials inventory account and a credit is applied to the accounts payable account.
Raw materials are used in a wide range of products. They can take many different forms. The type of raw materials inventory required by a business is determined by the type of manufacturing performed.
The manufacturing of goods or primary production necessitates the use of raw materials. On the balance sheet, the value of direct raw materials inventory is shown as a current asset.
Examples of raw materials
Steel, gasoline, oil, grain, corn, lumber, forest resources, natural gas, plastic, coal, and minerals.
Types of Raw materials
Raw materials are classified into two types:
- Direct and
- Indirect
The final product contains direct materials. Wood used to make furniture and fabric used to make clothing are two examples.
Indirect materials are used throughout the manufacturing process but are not directly present in the finished product. Oils used to maintain machinery or lightbulbs in a factory are two examples.
When raw materials are used, the accounting treatment differs depending on whether they 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 brief that a work in process account is unnecessary, debit the finished goods inventory instead. The cost of raw materials should be recorded in the cost of goods sold account once the finished goods are sold.
For indirect materials, debit the overhead account and credit the raw materials inventory asset account. The balance of the overhead account is allocated to cost of goods sold and ending inventory at the end of the accounting period.