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.
Asset Accounts
When an Inventory Part is purchased your Inventory Asset Account is increased by the Average Cost and your bank account is reduced by the same amount. If you don't pay for the product immediately then your Accounts Payable increases. Overall the value of your assets on your balance sheet don't change and this transaction has no impact on your Profit and Loss ie you swap product for cash.
The cost of the Inventory Part is offset against income at the time it is sold via the 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 sell value and your cash increases. If you dont get paid immediately then your Accounts Receivable increases.
Your profit on this transaction as shown in the Profit & Loss account is the Income less COGS.
What if I sell a product that has zero or negative stock?
If your stock is at or below zero and you sell the product, ERP uses the last average cost used for the COGS account. 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, automatically by ERP Software to reflect the actual cost of goods sold the next time you purchase stock in and bring the quantity to zero.
So in this case the the COGS posting will be on the purchase order transaction not on the sales transaction.
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 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 Type.
These 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.
