Inventory Related Accounts
From TrueERP wiki
Overview
There are three accounts linked to an Inventory Part at the time the product is created. Correct selection of these accounts you should understand how these accounts are used by ERP Software. The accounts are:
- COGS Account
- Asset Account
- Income Account
Inventory Parts When an Inventory Part is purchased your Inventory Asset Account is increased by the net cost and your cash asset is reduced by the same amount (or your accounts payable increases). Overall the value of your assets does not change and this transaction has no impact on your Profit and Loss. The cost of the Inventory Part is offset against income at the time it is sold via the Cost of Goods Sold or COGS Account.
If you are using the Average Cost method of stock valuation, at the time an Inventory Part is sold, the Asset Account is reduced by the Average Cost and the COGS account is increased by the Average Cost. At the same time the Income Account is increased by the net sale value and your cash increases (or your accounts receivable increases) by the same amount. Your profit on this transaction as shown in the Profit & Loss account is theIncome less COGS.
What if I sell a product that has zero or negative stock?
If your stock has been reduced to zero and you process another sale ERP Software has to guess what the cost of goods sold will be. It does this by using the average cost of the product at the time that the quantity went to zero. If no stock has ever been purchased this figure will be zero. This figure is then adjusted by ERP Software to reflect the actual cost of goods sold the next time you purchase stock in and bring the quantity to zero.
Non-Inventory Parts Non-Inventory Parts are not included in your Inventory Assets Account but are expensed at the time of purchase.
When purchasing a Non Inventory Part, the nett purchase price is posted as an expense to the COGS account and your Cash is reduced (or Accounts Payable increased).
On the sale of a Non-Inventory Part, the Income Account is increased by the net sale value and your cash increases (or your accounts receivable increases) by the same amount. Other Products
Other type products are generally not purchsed. eg. It may be a service your provide. Sales of Other type products are posted to the income account as for Non-Inventory Asset products as above. If you do purchse an Other type product the cost is posted as a negative sale to the Income Account.
