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| Accounting of Inventory / Stock |
The value of available inventory is treated as an Asset in company's Chart of Accounts. Depending on the type of item, it can be treated as Fixed Asset or Current Asset. To prepare Balance Sheet, you should make the accounting entry for those assets. There are generally two different methods of accounting for inventory:
Periodic Accounting
In this method, the system does not create accounting entries automatically for assets, at the time of material puchases or sales.
In an accounting period, you buy and receive items of a certain value. This value is marked as an expense in your accounting books. You sell and deliver some of these items.
At the end of an accounting period, the total value of items, that remain to be sold, need to be booked as the company’s assets, often known as stock-in-hand.
The difference between the value of the items remaining to be sold and the previous period’s stock-in-hand can be positive or negative. If positive, this value is removed from expenses (cost-of-goods-sold) and is added to assets (stock-in-hand / fixed-assets). If negative, a reverse entry is passed.
This complete process is called Periodic Accounting.
This process is usually followed when using a manual system of book keeping. It reduces effort at the cost of accuracy.
Auto / Perpetual Accounting
When you buy and receive items, those items are booked as the company’s assets (stock-in-hand / fixed-assets). When you sell and deliver those items, an expense (cost-of-goods-sold) equal to the buying cost of the items is booked. General Ledger entries are made after every transaction. This improves accuracy of Balance Sheet and Profit and Loss statement. And the value as per Stock Ledger always remains same with the relevant account balance.
This process is called Perpetual Accounting.
Steps To Take Before Activation
- Setup the following default accounts for each Company
- Stock Received But Not Billed
- Stock Adjustment Account
- Expenses Included In Valuation
- Cost Center
- Enter Asset / Expense account for each warehouse depending upon type of warehouse (Stores, Fixed Asset Warehouse etc).
Note: If you are currently using Periodic Accounting and want to switch to Auto / Perpetual Accounting, follow the steps below:
- Follow Step 1
- To enable Perpetual Accounting, existing stock balances must be synced with relevant account balances. To do that, calculate available stock value and book stock-in-hand/fixed-asset (asset) against cost-of-goods-sold (expense) through Journal Voucher.
- Create new warehouse for every existing warehouse.
- Assign Asset / Expense account while creating warehouse.
- Create Stock Entry (Material Transfer) to transfer available stock from existing warehouse to new warehouse
Activation
Go to Setup > Accounts Settings > check "Make Accounting Entry For Every Stock Entry"
What Will It Do For You?
It will make it easier for you to maintain accuracy of company's stock-in-hand, fixed-assets and cost-of-goods-sold. Stock balances will always be synced with relevant account balances, so no more periodic manual entry to balance them.
In case of new back-dated stock transactions or cancellation/amendment of an existing one, all the future Stock Ledger entries and GL Entries will recalculated for all related items.
The same is applicable if any cost is added to Purchase Receipt through Landed Cost Wizard.
What Will It Not Do For You?
It will not affect accounting of existing stock transactions submitted prior to the activation of Perpetual Accounting. Auto / Perpetual Accounting totally depends upon the item valuation rate. Hence, you have to be more careful entering valuation rate while making Purchase Receipt, Material Receipt or Manufacturing / Repack
Example
Consider following Chart of Accounts and Warehouse setup for your company:
Chart of Accounts
- Assets (Dr)
- Current Assets
- Accounts Receivable
- Jane Doe
- Stock Assets
- Stock In Hand
- Tax Assets
- VAT
- Fixed Assets
- Office Equipments
- Liabilities (Cr)
- Current Liabilities
- Accounts Payable
- East Wind Inc.
- Stock Liabilities
- Stock Received But Not Billed
- Tax Liabilities
- Service Tax
- Income (Cr)
- Direct Income
- Sales Account
- Expenses (Dr)
- Direct Expenses
- Stock Expenses
- Cost of Goods Sold
- Expenses Included In Valuation
- Stock Adjustment
- Shipping Charges
- Customs Duty
Warehouse - Account Configuration
- Stores - Raw Materials
- Work In Progress - Raw Materials
- Finished Goods - Finished Goods
- Fixed Asset Warehouse - Office Equipments
Purchase Receipt
Suppose you have purchased 10 quantity of item "RM0001" at $200 and 5 quantity of item "Desktop" at $100 from supplier "East Wind Inc". Following are the details of Purchase Receipt:
Supplier: East Wind Inc.
Items:
Item Warehouse Qty Rate Amount Valuation Amount RM0001 Stores 10 200 2000 2200 Desktop Fixed Asset Warehouse 5 100 500 550
Taxes:
- Shipping Charges = 100 ; Total and Valuation
- VAT = 120 ; Total
- Customs Duty = 150 ; Valuation
Stock Ledger
General Ledger
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Purchase Invoice
Supplier: East Wind Inc.
Items:
- Item = RM0001 ; Warehouse = Stores ; Qty = 10 ; Rate = 200 ; Amount = 2000
- Item = Desktop ; Warehouse = Fixed Asset Warehouse ; Qty = 5 ; Rate = 100 ; Amount = 500
Taxes:
- Shipping Charges = 100 ; Total and Valuation
- VAT = 120 ; Total
- Customs Duty = 150 ; Valuation
GL Entry
| Account | Debit | Credit |
|---|---|---|
| East Wind Inc. | 0 | 2500 + 100 + 120 = 2720 |
| Stock Received But Not Billed | 2500 + 100 + 150 = 2750 | 0 |
| Shipping Charges | 100 | 0 |
| VAT | 120 | 0 |
| Expenses Included In Valuation | 0 | 100 + 150 = 250 |
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Delivery Note
Customer: Jane Doe
Items:
- Item = RM0001 ; Warehouse = Stores ; Qty = 5 ; Rate = 200 ; Amount = 1000 ; Buying Amount = (2200/10)*5 = 1100
Taxes:
- VAT = 80
- Service Tax = 50
GL Entry
| Account | Debit | Credit |
|---|---|---|
| Raw Materials | 0 | 1100 |
| Cost of Goods Sold | 1100 | 0 |
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Sales Invoice
Customer: Jane Doe
Items:
- Item = RM0001 ; Qty = 5 ; Rate = 100 ; Amount = 500
Taxes:
- VAT = 80
- Service Tax = 50
GL Entry
Item Valuation Rate for this transaction = 750 / 10 = 75
| Account | Debit | Credit |
|---|---|---|
| Jane Doe | 500 + 80 + 50 = 630 | 0 |
| VAT | 0 | 80 |
| Service Tax | 0 | 50 |
| Sales Account | 0 | 500 |
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