Setting up an Inventory Asset Account

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Setting up an Inventory Asset Account

Erik Wickstrom
Hi all,

I'm working on setting up my business' books in gnucash - so far it's been a
smooth process :-)  I do have an accounting question though.  My
understanding is that from an accounting standpoint inventory is considered
an asset.

I've created 2 accounts, Inventory Asset (under current assets) and
Inventory Expense.  If I purchase $1,000 in inventory, I naturally have a
$1k inventory expense, and I've exchanged $1000 cash for $1000 in goods.
How do I represent this transaction in gnucash?  Right now I have a $1000
expense, and a negative balance of $-1000 in my inventory asset account.

How do I make the $1000 come out of my checking account, have my expense
paid, and have the inventory asset increase?

Thanks for your help!
Erik
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Re: Setting up an Inventory Asset Account

Dale Alspach
This is not an expense, but a transfer between assets. If you are
selling the inventory, you should have a cost of goods sold account.

Buy 100 widgets at $10 each. Inventory debit $1000, checking credit $100.

Sell widget for $13. Income credit $3, Inventory credit $10, Cost of Goods
Sold debit $10, checking debit $3.

I hope an accountant will clarify this but Cost of Goods
Sold is a special expense account I believe since it is not really an
operating expense.

Dale Alspach
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Re: Setting up an Inventory Asset Account

Andrew Sackville-West-2
On Wed, Nov 01, 2006 at 06:36:07PM -0600, Dale Alspach wrote:
> This is not an expense, but a transfer between assets. If you are
> selling the inventory, you should have a cost of goods sold account.
>
> Buy 100 widgets at $10 each. Inventory debit $1000, checking credit $100.
>
> Sell widget for $13. Income credit $3, Inventory credit $10, Cost of Goods
> Sold debit $10, checking debit $3.

I don't think that's right because if you sell the widget for $13,
then you've got $13 coming into your checking account...

How about:

Income credit $13, checking debit $13
Inventory credit $10, COGS debit $10.

that way your income - COGS = $3, the gross profit. Your way
says income - COGS = -$7 which is not the case.

>
> I hope an accountant will clarify this but Cost of Goods
> Sold is a special expense account I believe since it is not really an
> operating expense.

IANAA, but as I understand it you are correct. A typical chart of
accounts will have various top-level income accounts, a top-level set
for COGS, and a top level set for "Operating Expenses". I think the
reasoning is that Income - COGS = gross profit and thus they belong at
that level. everything else is "overhead" or operating expenses.

I don't think it matters that much though. The accountant always
charges the same amount anyway ;)

A

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Re: Setting up an Inventory Asset Account

Dale Alspach
Yes, I messed it up a bit.


Dale Alspach


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Re: Setting up an Inventory Asset Account

Ivars Grinbergs
In reply to this post by Erik Wickstrom
As far as I remember financial accounting principles, when you buy
inventory you don't have expenses - it is just exchange of one asset
into another. You will have esxpenses when you sell inventory.

For example:

trx #1a: buy inventory, pay to vendor
D inventory(asset) $100 (5 items @ $20 each)
C cash(asset) $100

trx #1b: pay for delivery to warehosue (costs that will be recorded in
expenses, when sale will happen)
D inventory(asset) $10
C cash(asset) $10

trx#2: sell inventory (issue bill to customer)
D acc/rec(asset) $150 (3 items @ $50 each)
C sales(income) $150

trx#3: record cost of goods sold, for instance, when goods leave warehouse
D cogs(expenses) $66 (3 items @ $22 each)
C inventory(asset) $66  (there are still 2 items at 22 each in the
warehouse)

trx#4: customer pays bill
D bank account(asset/bank) $150
C acc/rec(asset) $150

wbr,
Ivars


Erik Wickstrom wrote:

> Hi all,
>
> I'm working on setting up my business' books in gnucash - so far it's been a
> smooth process :-)  I do have an accounting question though.  My
> understanding is that from an accounting standpoint inventory is considered
> an asset.
>
> I've created 2 accounts, Inventory Asset (under current assets) and
> Inventory Expense.  If I purchase $1,000 in inventory, I naturally have a
> $1k inventory expense, and I've exchanged $1000 cash for $1000 in goods.
> How do I represent this transaction in gnucash?  Right now I have a $1000
> expense, and a negative balance of $-1000 in my inventory asset account.
>
> How do I make the $1000 come out of my checking account, have my expense
> paid, and have the inventory asset increase?
>
> Thanks for your help!
> Erik
> _______________________________________________
> gnucash-user mailing list
> [hidden email]
> https://lists.gnucash.org/mailman/listinfo/gnucash-user
> -----
> Please remember to CC this list on all your replies.
> You can do this by using Reply-To-List or Reply-All.
>
>
>  

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Re: Setting up an Inventory Asset Account

Doug Laidlaw
That is probably right, but where is the double entry for the cash?  You have
one between Inventory and Expense, and one between Cash and ???

Using COGS, you leave Inventory alone.  You have Purchases and Sales.  What
you buy is debited to Purchases (Expense) What you sell is credited to Sales
(Income)  At balance date, you do a stocktake (manual or continuous; that is
a policy issue.)

Then you create a Cost of Goods Sold account:

Opening inventory as per Inventory account (transferred, zeroes it.)
Add Purchases
Less Sales
Closing Inventory as per stocktake (creates your new balance in Inventory for
your next accounting period.)

What remains is Gross Profit or Loss, and is transferred to P&L

That is what I learned as a lawyer, straight from the textbook.  You would
have to ask an accountant how it is done in practice.

Doug.

On Friday 03 November 2006 07:35, Ivars Grinbergs wrote:

> As far as I remember financial accounting principles, when you buy
> inventory you don't have expenses - it is just exchange of one asset
> into another. You will have esxpenses when you sell inventory.
>
> For example:
>
> trx #1a: buy inventory, pay to vendor
> D inventory(asset) $100 (5 items @ $20 each)
> C cash(asset) $100
>
> trx #1b: pay for delivery to warehosue (costs that will be recorded in
> expenses, when sale will happen)
> D inventory(asset) $10
> C cash(asset) $10
>
> trx#2: sell inventory (issue bill to customer)
> D acc/rec(asset) $150 (3 items @ $50 each)
> C sales(income) $150
>
> trx#3: record cost of goods sold, for instance, when goods leave warehouse
> D cogs(expenses) $66 (3 items @ $22 each)
> C inventory(asset) $66  (there are still 2 items at 22 each in the
> warehouse)
>
> trx#4: customer pays bill
> D bank account(asset/bank) $150
> C acc/rec(asset) $150
>
> wbr,
> Ivars
>
> Erik Wickstrom wrote:
> > Hi all,
> >
> > I'm working on setting up my business' books in gnucash - so far it's
> > been a smooth process :-)  I do have an accounting question though.  My
> > understanding is that from an accounting standpoint inventory is
> > considered an asset.
> >
> > I've created 2 accounts, Inventory Asset (under current assets) and
> > Inventory Expense.  If I purchase $1,000 in inventory, I naturally have a
> > $1k inventory expense, and I've exchanged $1000 cash for $1000 in goods.
> > How do I represent this transaction in gnucash?  Right now I have a $1000
> > expense, and a negative balance of $-1000 in my inventory asset account.
> >
> > How do I make the $1000 come out of my checking account, have my expense
> > paid, and have the inventory asset increase?
> >
> > Thanks for your help!
> > Erik
> > _______________________________________________
> > gnucash-user mailing list
> > [hidden email]
> > https://lists.gnucash.org/mailman/listinfo/gnucash-user
> > -----
> > Please remember to CC this list on all your replies.
> > You can do this by using Reply-To-List or Reply-All.
>
> _______________________________________________
> gnucash-user mailing list
> [hidden email]
> https://lists.gnucash.org/mailman/listinfo/gnucash-user
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--
Most of the important things in the world have been accomplished by people who
have kept on trying when there seemed to be no hope at all.
   --Dale Carnegie
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Re: Setting up an Inventory Asset Account

Shocky
On Friday 09 February 2007 21:10, Doug Laidlaw wrote:

> That is probably right, but where is the double entry for the cash?  You
> have one between Inventory and Expense, and one between Cash and ???
>
> Using COGS, you leave Inventory alone.  You have Purchases and Sales.  What
> you buy is debited to Purchases (Expense) What you sell is credited to
> Sales (Income)  At balance date, you do a stocktake (manual or continuous;
> that is a policy issue.)
>
> Then you create a Cost of Goods Sold account:
>
> Opening inventory as per Inventory account (transferred, zeroes it.)
> Add Purchases
> Less Sales
> Closing Inventory as per stocktake (creates your new balance in Inventory
> for your next accounting period.)
>
> What remains is Gross Profit or Loss, and is transferred to P&L
>
> That is what I learned as a lawyer, straight from the textbook.  You would
> have to ask an accountant how it is done in practice.
>
> Doug.
...

IANAA either, but that's my understanding as well. Inventory is an asset. It's
not expensed until it's sold (or disposed of if it's expired, destroyed, or
whatever).

It's a lot more complex than this though. Unless you have a very trivial
inventory (one type of goods always purchased at the same cost, including
shipping), you're going to have to keep some auxiliary records. When you
expense something sold, you have to assign a cost to it. This is a loaded
cost, including for example the cost of shipping the inventory to you. And
typically costs vary, so you have to decide on a costing policy: FIFO, LIFO
or average (in most cases LIFO doesn't make sense, and may not be allowed by
tax authorities).

Short of talking to an accountant, you'd better pick up an accounting textbook
with a good section on inventory management, and get familiar with it.

Shocky
--
These are my opinions. Get your own.
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