Using software to control inventory movements.
As you can see from our previous article, (“predicting future inventory demand“) there are endless
variables that affect movements of inventory for accounting purposes. A process so complex is virtually impossible to do by hand so you need reasonably sophisticated software to capture this information with a minimum of human intervention.
To go through this exercise, we shall use an ERP software designed for the SME market called Mamut. This is comparable with advanced software such as NetSuite, Sage line 200 or SAP business One, as the principles are the same. You will need sign up and access the following interactive tool in our “downloads” section (Examples of journals by stock movement) to follow the exercise.
Entering supplier details about their products.
We will shall assume for the moment, we have gone through the exercise of determining our optimum levels of supply based on anticipated demand. Supplier delivery times should be understood, allow time for assembly with existing and anticipated orders to give us our availability. Each product record should be set up and assigned a supplier. If you have multiple suppliers then they would have their price list, (in this case I have included exchange rates to add to the complexity) deliveries and unique qualities of their item. The minimum level and purchase number for quantity discounts should also be included. Once that is complete, we can now order some items.
Raising a purchase order to a supplier for inventory.
A purchase order would need to be raised to the supplier. This provide a list of what products are required, in what quantities, agreed prices and maybe instructions for delivery (address, accept between 9-10 on a Thursday etc.). The type of transport should be defined (truck, ship, FedEx), special requirements (temperature for food stuffs or medical etc.) and who is paying for delivery. At this stage it is just a shopping list. Once you send that to the supplier the orders are confirmed, and they will start preparing the goods. This is done on the understanding that they will be paid later.
It useful to have their supplier number for each item which should be different to your own product number. This provides a number of uses. This avoids confusion and prevents your customer from poaching the item directly from the wholesaler. At this stage no accounting records have taken place.
Accounting for inventory received.
Once the goods arrive, in part or in full, then you need to decide how they are to be handled in terms of accounts. If the item is of low value (paper clips or consumables) the transaction should debit “materials purchase” and credit “accruals”. Why accruals not creditor control? That is because we have not received the supplier invoice yet so we don’t have a tax point so therefore we can’t claim back the VAT. The accruals are a dumping ground that records a liability on your balance sheet. As described in an earlier article, this can have a dramatic effect on your annual accounts, if deliveries are received at the end of a financial year. If the goods are of value, and meant for resale, they are an asset stored in the warehouse until sold. Therefore, the debit goes to fixed assets, inventory. They are purchased and owned by the company and therefore of value. For these journals the debit would change from P&L expense to balance sheet current assets.
Supplier invoice is posted and goods sold and delivered.
The next change will be when the suppliers invoice arrives and the accrual is released and transferred to creditor control and VAT reclaimed. The balance sheet doesn’t really change. The amount owed is the same, but the liability is now recognised as a formal request to pay.
On the other side of the coin the customer takes delivery of the goods and they are taken out of the warehouse. For a reminder the journal goes from stock to another asset nominal code of “stock delivered not invoiced”. This is done so that there is a reminder to raise the invoice to the customer for goods received. Once this is done the inventory asset is declared as a cost of sale under “materials purchased”. The sale is registered as an income and the VAT collected. The price difference between the purchase price and the sales give you your margin and therefore profit.
Next in the series we shall look at goods that apply duty freight invoicing.
to investigate more of what this software can do, go to our “Modular Software” in a services section and click on “procurement and logistics”.