Just in Time System and its Accounting Policy

I learned that I can’t apply general accounting rules to all businesses.


I work as an intern during summer doing part of bookkeeping and some assistant work. The company is a manufacturer and its production system is different from a usual one. It employs just in time system.

The company that employs just in time system purchases materials and produces products after they received customers’ order or based on customers' demand. The merit of this system is that the company doesn’t need to keep inventories as raw materials, work-in-process inventory, and finished goods inventory. Consequently, it can save expenses that happen through the purchase and production processes of a usual manufacturer.

I learned accounting methods for a usual manufacturer (and other businesses), so I was very confused when I was asked to post adjustment entries for month-end inventory.

The company’s accounting method is like the following:

The company first records expenses when it purchases materials and necessary parts for production. (Usual business records inventories upon purchase of materials.)

The end of a certain period, in this case, a month, the company counts materials and parts physically as well as calculate labor costs. Then it makes adjusting entries. If the change in materials or inventories between the beginning of the month and ending of the month is positive, it subtracts (credits) recorded expenses because the used amount has been less than purchased amount. If the change in materials and inventories between the beginning and ending of the month is negative, it adds (debits) more materials or inventories because the used amount has been more than purchased amount.

What’s happening in a real business setting is sometimes different from what I learn at school. This is a very good example.