Moving from Non-Inventory to Inventory, Insight Please!

USA Discussion in 'General Accountancy Discussion' started by garn2, Feb 8, 2019.

  1. garn2


    Feb 8, 2019
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    IT side here, but I'm driving a project that is creating accounting process changes, so I need to be somewhat knowledgeable for my own purposes and I would like to have perspectives and opinions from others outside of who I have immediately available.

    This company sells lots of things. For this scope, consider retail, drop ship, and small to large installation projects (not manufacturing, but physical installation along with programming).

    Right now, PO's we invoice match go straight to COGS.

    We want to move towards using inventory asset accounts and I have a few questions/concerns.

    1. We have multiple departments; Installations, Retail, Commercial Sales (dropships primarily). Do we need, or is there a good justification to use multiple inventory asset accounts?

    2. It *sounds* like the use of a Work In Progress account to hold the value of product while an installation project is ongoing is a good idea, is this typical for non-manufacturing operations? The downside to this is with our solution we would have to do manual transfers of any inventory items to the WIP account.

    3. Is it standard practice to have sales invoices with both inventory and non-inventory items on it, and have entries applied to COGS at different times? We almost always have miscellaneous materials line items on our invoices and these would be non-inventory type items (hardware, cables, connectors). Would it be wise to create a different series of COGS specifically for inventory items so they are easily discernible?

    4. Sort of a factor of the previous question, how *should* we handle misc. hardware and non-inventory goods for sale moving forward? Should that even go to COGS immediately, should it go to an expense account, or something else? Most of these items we purchase via PO's with specific items, however we do not want to track them or sell them itemized.

    5. For dropships, in the scenario that we receive/invoice match from the vendor before we sales invoice the customer, should I have another account to use instead of an the inventory asset account, since in reality it is not in our possession at any time?
    Thanks much for any opinions or feedback!
    garn2, Feb 8, 2019
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  2. garn2


    Sep 20, 2014
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    Central, New York
    1.) The use of multiple inventory accounts would depend on what you’re inventorying & how closely/accurately you want to track the movement of said inventory & would typically be inventoried by type. I not sure what you’d be inventorying if you’re not a manufacturing facility, so it’s hard to give examples.

    2.) WIP usually is usually used in the production process and is a component of the inventory asset account on the balance sheet. Without further knowing your business, I cannot give more insight, what is being “installed” and are there many tangible components to the installation process?

    3.) Typically I would not invoice non-inventoried items as they typically are items that get used over many different parts, processes or areas of the business - if you needed to invoice a non-inventoried item – I would classify them under a misc. sale so it does not impact your inventory asset account(s).

    4.) In my company, we expense all non-inventoried items but we also do not resell those items either. A good rule of thumb is – if you’re selling a particular item, I would inventory it (in my opinion). Better tracking and analytics that way.

    5.) This can be tricky as you need to know when your company takes over ownership of the asset, sometimes it’s upon purchase & departure of the product from the vendor while other times it’s when the asset reaches your “loading docks” & someone has signed for it within your company. With this being said – you really need to know when your company assumes ownership of the asset. If your company assumes ownership upon departure of the vendor, I would include it in an “in-transit” inventory account – that why if something happens to the asset while in transfit, your company will have it on record for having it. Once at the drop location, the inventory could then be transferred to the appropriate inventory account where the inventory would then be removed upon invoicing of the inventoried items. Again – it all depends on how “traceable” you want the inventory to be. I, personally, like to have the traceability of all inventoried items.

    Hope this helps and it easy to understand. Take care.
    ttreacy, Feb 8, 2019
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  3. garn2

    kirby VIP Member

    May 12, 2011
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    Also, notify the folks who do your taxes of the change. They may need to file a form 3115 with IRS. Also, notify your auditors as they may want to be on-site during your initial inventory count as part of the change.
    kirby, Feb 10, 2019 at 5:04 AM
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