Final answer:
There cannot be a single account for inventory movements because these involve multiple transactions that affect the balance sheet and the income statement, requiring different accounts to record purchases, sales, and adjustments accurately.
Step-by-step explanation:
There can be no single account to record movements in inventory levels because inventory movements involve multiple types of transactions that impact both the balance sheet and the income statement.
Typically, businesses use several accounts to track these changes accurately.
For instance, when inventory is purchased, it is recorded in an Inventory account on the balance sheet.
Then, as the inventory is sold, the cost associated with the sold goods is moved from the Inventory account to the Cost of Goods Sold (COGS) account on the income statement.
Also, inventory can be affected by losses, damages, or theft, which would require adjustments via different accounts such as an Inventory Shrinkage or Inventory Adjustments account.
Importance of Multiple Accounts
The use of multiple accounts allows for detailed tracking and a clearer financial picture.
It helps in understanding the cost flow assumptions (like FIFO, LIFO, or Weighted Average), which are important for inventory valuation and making informed business decisions regarding pricing, purchasing, and sales strategies.