Inventory management

Question asked by Katalin Kovacs 8 years ago

Hi, Can someone help me please with inventory management. Based on accrual accounting and perpetual inventory system when I purchase an item (finished goods) for sale I need to record as the following (if I understood right) Debit "Inventory" and "Credit Accounts payable"

when I sell an item: debit "account receivable" and credit "sales"

also debit "Cost of Goods sold" and credit "inventory"

Can someone please advice me how to do this in clearbooks?

I have created a bill for the purchase order - however I am not sure which account I need to choose (Inventory or cost of good sold or other?) Is the inventory: only the buying price of the items or includes all the buying expenses ie. freight, marine insurance, duty, account fees for international payment etc). Can you please let me know what is the entry of the above expenses in clearbooks

Cost of good sold account - do I need to calculate manually in clearbooks and do a journal or there is any easier option?

Thank you for the help in advance

Katalin

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5 Replies

Hi Katlin - sorry for the delay but I've had to read this several times and get lost half way down.

There are two ways to do this, the inventory account way and the non-inventory account way, it's the latter that uses opening & closing stock accounts in "Cost of Sales". Your examples all seem to use the first method, which is fine, there is no right or wrong way, it's just that the first method ends up generating far more journal entries.

Looking at your first example, I can't tell whether the goods, freight & duty are all invoiced to you by one supplier? If so then you just enter the one bill, for £3,825 to the Inventory account. If however you get one bill for £3,000 and another for the freight & duty of £825, then you have two bills to enter and can put them both to the Inventory account or, if you want to keep the costs separate, you put the £3,000 to "Inventory - goods" account and the £825 to a new account "Inventory - freight & duty".

Then, if/when you sell say 100 of these items, you need to create a journal to debit cost of sales with £1,275 (100 x £12.75) and credit Inventory with £1,275 (or the 2 accounts with £1,000 and £275), leaving a balance of £2,550.

The other method I mentioned, would have you putting the £3,825 of bills to cost of sales account(s) then, at the end of the period, recording the closing stock cost of 200 items, £2,550, by debiting Inventory and crediting "closing stock" account in cost of sales.

Then, the first day of the next accounting period, you move the £2,550 from Inventory to "Opening stock" in Cost of sales.

There have been a few requests over the years for a full value based stock accounting system but the cost of doing this could not be justified, given only a tiny % of users wanted it. As is happening with most accounting apps, rather than reinvent the wheel, the alternative is for apps to allow integration with other apps, so you use your favoured stock management app and link it with your favoured accounting app.

Best answer
8 years ago

Hi Katalin - it's so nice to see someone asking about debits & credits!

Unless a business has a fully integrated stock system it is more likely to put all purchases and related costs to the appropriate "Cost of sales" accounts (Goods, Freight, insurance etc) then perform a stock take at the end of each month, quarter & year and transfer (by journal) out of cost of sales (cr), into inventory (dr) the related costs of that stock.

The method you describe, of putting all costs to the inventory account, then journalling out cost of sales items as they are sold, ends up with the same result but, instead of one journal, at the end of each period, you end up having to create a journal every time you sell something.

As I say, if you have a fully integrated system then these journals should happen automatically but in CB, you will have to create a journal every time you sell.

So, when you buy some goods or a related cost, you either put the bill to the relevant cost of sales account or put all of them to the Inventory (Stock) account.

Then when you sell something the sales invoice goes to the relevant Revenue account and, if costs have gone to the Inventory account, you have to work out for yourself the cost of the goods and related costs you've just sold and do a journal entry, debiting each of the cost of sales accounts, and crediting inventory.

Hope that helps?

8 years ago

Sorry forgot to say:

With the common approach of calculating stock at the end of each period, it's usual to have, within the cost of sales accounts, one account for opening stock and another for closing stock.

So, at the start of the accounting period (be that a month, quarter or year) the Open stock account will show the debit of the stock calculated then.

Then, at the end of the period, the stock is again calculated and is debited to the Inventory/Stock account on the balance sheet and credited to the closing stock account in cost of sales.

On the first day of the next accounting period, you take the the closing stock you just calculated into cost of sales by crediting the balance sheet account and debiting the opening stock account.

And so it goes on, until you retire!

8 years ago

Dear Paul

Thank you very much for your explanation and help. I really appreciate it. I have used an example how I did. Will you be so kind please and have a look if this is how you mean?

Example (putting all cost to inventory account) Opening inventory 0 Purchase 300 items at £10=£3000 Freight cost: £325 Import duty:£500 Total shipping cost: £825.00 Spread the cost of 825/500= £2.75 per item

  1. Create Bill for the items 300 x 12.75(10+2.75)=£3825 /inventory account/ ticked record stock 1 x -825= -825 /shipping cost clearing account- created an offset account in cost of sales/ Total bill: 3000

  2. Create bill for freight 1x 325 /debit shipping cost clearing account/

  3. Create bill for import duty 1x 500 /debit shipping cost clearing account/

Result: Inventory value (asset account) debit £3825 Shipping cost clearing account (cost of sales) 0

Sell items: 100 at £18 and 100 at £20 Create invoice to vendor 100x£18=1800 /revenue account/ Create another invoice 100x£20=2000/revenue account/

Purchase 500 @ £11= £5500 Shipping cost £800 (800/500=1.60) Create a bill for 500x 12.60 (11+1.60)=£6300 /inventory account/ 1x-£800=-£800/shipping clearing account/ Bill total £5500

Create a bill for shipping £800 /shipping clearing account/

Sell 100 item at 20£ Create an invoice for 2000 which is debits revenue account and credit accounts receivable.

Calculate cost of goods sold as below and do a journal: cr inventory(asset) by 3812.50 and debit cost of goods sold(expense) by 3812.50 Using “Moving Average Valuation” (100 at £12.75+ 500 at £12.60)/600 1275+6300=£7575/600=£12.625

Result: Revenue account: (1800+2000+2000)=£5800 Cost of Goods Sold Account: (100x12.75)+(10012.75)+(10012.625)=£3812.50 Gross profit: 5800-3812.50=1987.50 Inventory Account: 3825 beginning inventory+ 6300 cost of purchase-3812.50 cost of goods sold=6312.50

Checking: Quantity of ending inventory: Beginning + purchased-sold 300+500-300=500

500*12.625=£6312.50

Can I do every month the journal for inventory and COGS instead of each time when I sell an item?

You mentioned in your previous message the opening and closing stock account in cost of sales. I'm not sure how I need to put in the above steps? Will you please advice? The opening inventory account shows 0 and closing inventory (asset) 6312.50

I do understand the other way - to record all the costs on the cost of sale account - however if I record the costs this way, clearbooks doesn't show the cost price.

Would clearbooks do an improvement on stock management in the future which calculates inventory value and cost price – not just the quantities so won't be necessary lots of manual calculations.

Thank you very much for the help Kind regards, Katalin

8 years ago

Hi Katlin - sorry for the delay but I've had to read this several times and get lost half way down.

There are two ways to do this, the inventory account way and the non-inventory account way, it's the latter that uses opening & closing stock accounts in "Cost of Sales". Your examples all seem to use the first method, which is fine, there is no right or wrong way, it's just that the first method ends up generating far more journal entries.

Looking at your first example, I can't tell whether the goods, freight & duty are all invoiced to you by one supplier? If so then you just enter the one bill, for £3,825 to the Inventory account. If however you get one bill for £3,000 and another for the freight & duty of £825, then you have two bills to enter and can put them both to the Inventory account or, if you want to keep the costs separate, you put the £3,000 to "Inventory - goods" account and the £825 to a new account "Inventory - freight & duty".

Then, if/when you sell say 100 of these items, you need to create a journal to debit cost of sales with £1,275 (100 x £12.75) and credit Inventory with £1,275 (or the 2 accounts with £1,000 and £275), leaving a balance of £2,550.

The other method I mentioned, would have you putting the £3,825 of bills to cost of sales account(s) then, at the end of the period, recording the closing stock cost of 200 items, £2,550, by debiting Inventory and crediting "closing stock" account in cost of sales.

Then, the first day of the next accounting period, you move the £2,550 from Inventory to "Opening stock" in Cost of sales.

There have been a few requests over the years for a full value based stock accounting system but the cost of doing this could not be justified, given only a tiny % of users wanted it. As is happening with most accounting apps, rather than reinvent the wheel, the alternative is for apps to allow integration with other apps, so you use your favoured stock management app and link it with your favoured accounting app.

Best answer
8 years ago

Thank you very much for the reply Paul, It was very helpful.

Kind regards, Katalin

8 years ago

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