Inventory cost adjustment
The cost of sales of an inventory item realised when the product sold, whereas the non-inventory item realised upon purchase.
The purchase invoice debit the cost of sales account and credit accounts payable when a purchase invoice of the non-inventory item has recorded. Non-inventory item used in drop-shipping businesses, back-to-back, or project kind of order, which you do not track the inventory as the purchase made is fulfilling a specific customer order.
Inventory item is different, you purchase in bulk and sell it slowly to various customers. It debits the inventory assets (in Balance Sheet) and credit accounts payable account when purchase invoice has recorded. It debits the cost of sales and credit inventory assets account when sold.
The complexity comes in when you recorded an item as a non-inventory, sold it to a specific customer, being rejected and returned by the customer, and you converted it to stock (inventory assets).
Assuming you purchase a non-inventory item Ni-101 at $1000 for a customer, It debits the Cost of Sales and credit Accounts Payable account at $1000.
The customer returns the non-inventory item Ni-101 and exchange for an inventory item S-200, which has the same selling price and cost as Ni-101 on the following month.
You decided to stock up Ni-101 by creating a new product code Ni-101S (inventory item) since the original product, Ni-101, is a non-inventory item.
You can create a sales invoice for S-200 to reduce the stock on hand at $0 amount and a negative quantity of Ni-101S with $0 to add the stock back. This invoice:
Debit Accounts Receivable $0 Credit Sales (S-200) $0 Debit Cost of Sales (S-200) $1000 Credit Inventory Assets (S-200) $1000
Debit Sales (Ni-101S) $0 Credit Accounts Receivable $0 Debit Inventory Asset (Ni-101S) $0 Credit Cost of Sales (Ni-101S) $0
There is no movement of inventory asset value or cost of sales when Ni-101S adds to the stock on hand. The cost of sales has already realised earlier when the purchase invoice of Ni-101 has recorded.
The margin of Ni-101S will be 100% if the item sold.
This method shows a conversion of non-inventory to an inventory item, focus on the stock on hand but not the realisation of the cost of sales and stock valuation. For example, the cost of sales realisation of Ni-101 (non-inventory) could be in period one, whereas the sales or Ni-101S (inventory item) could be in period three.
However, if you prefer to realise the cost of sold of item Ni-101S upon item sold, then you may consider method 2.
This method requires using a purchase invoice to adjust the item cost of Ni-101S. First, you create a product (only checked the checkbox for 'We Buy This'), name it as COST_ADJ (or something which you preferred) and link the cost of sales to the expense account field.
Then, create a purchase invoice (you may create a creditor and code it as COST_ADJ) with Ni-101S in line one and COST_ADJ in line two. Ni-101S with quantity and value of $1000, this is to stock in and update the product cost. Whereas COST_ADJ is a negative quantity and value to reduce the cost of sales. The purchase invoice:
Debit Inventory Asset (Ni-101S) $1000 Credit Cost of Sales (COST_ADJ) $1000 Credit Accounts Payable $0
Next, create a sales invoice to the customer for inventory item S-200 with $0 selling price to indicate an item sold to the customer. This sales invoice:
Debit Accounts Receivable $0 Credit Sales $0 Debit Cost of Sales (S-200) $1000 Credit Inventory Asset (S-200) $1000
In future, MoneyWorks will debit the cost of sales and credit inventory asset $1000 when item Ni-101S sold. Method 2 is a better solution as it gives an accurate stock valuation.
Sign up a free demo to see how MoneyWorks works for your business finance.
#Inventory #Macaccountingsoftware #DesktopAccountingSystems #Cloudbasedaccountingsystems #MoneyWorksAccountingSingapore #smallbusinessaccountingsoftware