Scroll Top


    Raw Materials

    What are Raw Materials?

    Raw materials are substances primarily used in the production or manufacturing of goods. Raw materials are commodities or items that are bought and sold on the commodities exchanges globally. Ideally, the raw material is a basic substance in its natural, semi-processed state, or modified used as an input in a production process for consequent modification or transformation into a finished good.

    Examples of raw materials are steel, oil, corn, grain, gasoline, lumber, forest resources, plastic, natural gas, coal, and minerals, to mention a few.

    Understanding Raw Materials

    Raw materials are used in several manufactured products. They can be in different forms. The inventory of a company can consist of different kinds of raw materials depending upon the type of manufacturing they do. The inventory of raw materials needs detailed budgeting and a particular structure for accounting on the statement of profit and loss as well as the balance sheet.

    The manufacturing companies take appropriate steps to account for raw materials inventory. It includes three different inventory classifications on their balance sheet compared to just a single account for the non-manufacturers. The portion of current assets in the balance sheet for manufacturing companies will include:

    1. Inventory of raw materials
    2. Work-in-process
    3. Finished goods

    All inventory, including raw materials, should be prized at its comprehensive cost. The value includes shipping, storage, and preparation.

    The regular journal entries in an accrual accounting system for the initial purchases of raw materials inventory is to credit the cash account and debit the inventory. By debiting, the inventory increases the current assets and crediting cash will decrease the cash account by the inventory amount.

    When a company uses raw materials in production, it shifts them from the raw materials inventory to the account of work-in-process inventory. When a company finishes working on the work-in-process items, it adds the item to the finished goods inventory, getting them ready for sale.

    Types of Raw Materials

    There are two classifications to raw materials:

    1. Direct raw materials:

    These raw materials are those that companies directly use within the finished product, like the wood used for a chair. Direct raw materials are classified under the current assets on a balance sheet.

    Direct raw materials are incurred on the statement of profit or loss, included as the 'cost of goods sold'. Manufacturing companies must also take extra steps over non-manufacturing companies to generate more detailed expense reporting on costs of goods sold.

    1. Indirect raw materials:

    This type of raw materials do not form part of the final product but are alternately used for support in the production process. Indirect raw materials are recorded as long-term assets. Within long-term assets, they can take several forms, such as selling, general, and administrative or property, plant, and equipment.


    Raw material supply plays an essential role in the progress of an economy. A country may be dependent upon another for a particular raw material or can also be self-sufficient. Accordingly, the extent of generation or production of the raw materials affects the entire supply chain.


    Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

    Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

    CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

    Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

    Cleartax is a product by Defmacro Software Pvt. Ltd.

    Company PolicyTerms of use


    ISO 27001

    Data Center


    SSL Certified Site

    128-bit encryption