Posting Question on Inventory Purchases


T

Tee

One of my clients has just started purchasing frame parts (its an art
gallery) for the purpose of eventually making frames out of them. Until
now, because he hasn't been making his own frames, only ordering enough
moulding for customer-ordered framing jobs, everything has gone into COGS.
I'd like to get confirmation on the new procedure since the client is
looking at me cross-eyed when I try to explain it to him.

Since he won't be immediately making frames out of the parts, but will be
stockpiling them (parts) frequently, I'm thinking my procedure should be:

Purchase = debit COGS

When a frame is made from the raw materials:
AJE = debit Inventory Asset & credit COGS

Upon sale of finished frame:
Debit Sales & credit Inventory Asset

Granted my client isn't a bookkeeper or accountant but when he looks at me
like I've grown two heads it makes me think I need confirmation from an
accountant and his accountant is on vacation for a week.
 
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B

Bob

Tee said:
One of my clients has just started purchasing frame parts (its an art
gallery) for the purpose of eventually making frames out of them. Until
now, because he hasn't been making his own frames, only ordering enough
moulding for customer-ordered framing jobs, everything has gone into COGS.
I'd like to get confirmation on the new procedure since the client is
looking at me cross-eyed when I try to explain it to him.

Since he won't be immediately making frames out of the parts, but will be
stockpiling them (parts) frequently, I'm thinking my procedure should be:

Purchase = debit COGS

When a frame is made from the raw materials:
AJE = debit Inventory Asset & credit COGS

Upon sale of finished frame:
Debit Sales & credit Inventory Asset

Granted my client isn't a bookkeeper or accountant but when he looks at me
like I've grown two heads it makes me think I need confirmation from an
accountant and his accountant is on vacation for a week.
I don't think you would debit sales when selling the finished goods
rames) -- normally you would just make an adjustment at month end between
the COGS and inventory.
 
P

Paul

Tee said:
One of my clients has just started purchasing frame parts (its an art
gallery) for the purpose of eventually making frames out of them. Until
now, because he hasn't been making his own frames, only ordering enough
moulding for customer-ordered framing jobs, everything has gone into COGS.
I'd like to get confirmation on the new procedure since the client is
looking at me cross-eyed when I try to explain it to him.

Since he won't be immediately making frames out of the parts, but will be
stockpiling them (parts) frequently, I'm thinking my procedure should be:

Purchase = debit COGS

When a frame is made from the raw materials:
AJE = debit Inventory Asset & credit COGS

Upon sale of finished frame:
Debit Sales & credit Inventory Asset

Granted my client isn't a bookkeeper or accountant but when he looks at me
like I've grown two heads it makes me think I need confirmation from an
accountant and his accountant is on vacation for a week.

"Two heads"? Maybe three!

Debit "Purchases" for what he buys during the year, and make a credit entry
to "Purchases" and debit "Parts/Frame Inventory" at year-end (or a few times
a year) for what he actually has on hand.
 
T

Tee

Bob said:
I don't think you would debit sales when selling the finished goods
rames) -- normally you would just make an adjustment at month end between
the COGS and inventory.
Sorry, I wasn't very clear. I'm using Quickbooks Pro so I intend to create
an inventory "item" when a frame is built. It would need to have an
assigned income account.
 
T

Tee

The parts are inventory ("raw materials").
When purchased: debit Inventory (asset).

A finished frame is also inventory ("finished goods"). Upon completion you
would adjust inventory, reducing the number of parts and increasing the
finished goods. ***IF*** you account for the labour and overhead
components of finished goods, the value of the finished goods will exceed
the cost of the parts; if you account for the activity as a simple assembly
without adding labour and overhead, the cost of the finished goods will be
the same as the parts (assuming no damaged parts).

Upon sale:
Credit Inventory, Debit COGS.

Above is the simple textbook description of "perpetual inventory"
accounting. However neither you nor the client appears to understand the
process well enough to know whether he is using this method, or "periodic
inventory" which is quite different. I think you should wait until his
accountant returns from vacation.

--------------------

Thanks. I do understand what you're saying. This client, and his
accountant, do things differently than I'm used to. Its the accountant
who's had me entering raw materials as a Non-Inventory Item to date,
including the bit the client has already begun stockpiling. Therefore I've
only had the option, in Quickbooks, of assigning an Expense (COGS) and
Income (Sales) account. Inventory has only been used for finished products
ready for resale which have come, primarily, from artist consignments with a
small amount being purchased ready-made frames. Now, if I could change the
way things are done, and setup raw materials as an Inventory Item then that
would be perfect. I have a sneaking suspicion though that I'll meet with a
negative on changing the way things are currently done. To give you a
better idea of the situation uncut mats are a good example. Client orders
large mats in bulk then uses them as needed for sales, which means having to
cut them down then cut out for the artwork, often leaving leftover mat that
can be used for other projects. None of it is entered as Inventory. I
started doing the books last summer but they were already well established,
by the accountant, since 2001. So that's why I'm thinking differently, and
perhaps even wrongly within this setup, because its a system I'm not
accustomed to.
 
W

Wayne Brasch

Tee said:
One of my clients has just started purchasing frame parts (its an art
gallery) for the purpose of eventually making frames out of them. Until
now, because he hasn't been making his own frames, only ordering enough
moulding for customer-ordered framing jobs, everything has gone into COGS.
I'd like to get confirmation on the new procedure since the client is
looking at me cross-eyed when I try to explain it to him.

Since he won't be immediately making frames out of the parts, but will be
stockpiling them (parts) frequently, I'm thinking my procedure should be:

Purchase = debit COGS

When a frame is made from the raw materials:
AJE = debit Inventory Asset & credit COGS

Upon sale of finished frame:
Debit Sales & credit Inventory Asset

Granted my client isn't a bookkeeper or accountant but when he looks at me
like I've grown two heads it makes me think I need confirmation from an
accountant and his accountant is on vacation for a week.
Revenue accounts shouldn't normally be debited for any reason.

Wayne Brasch, CPA, M. S. Taxation
 
B

Beverly

Tara,

All items purchased for eventual resale, whether sold as is or with
further processing, should be a debit to inventory and a credit to
cash or accounts payable.

If items are processed further, direct labor and overhead used to
process these things further is normally added to its value as a part
of COGS called COG manufactured. If direct labor and overhead is
negligible, the inventory can simply be combined into an assembly or
kit (I believe Quickbooks has this feature, but if it doesn't all
parts of the completed item can be individually chosen for COGS) and
then chosen as the inventory item when sold.

Sales should not be debited unless there is a return. An illustration
of the entries used would be as follows:

The purchase:

Inventory-parts
AP or cash
(to record purchase)

If direct labor and overhead are added:

Direct labor
Overhead Items
AP or cash
(to record expense)

Inventory-assemblies
Direct Labor
Overhead Items
Inventory-parts
(to allocate expense to inventory)

Sale:

Cash or AR
Sales
(to record sale)

COGS
Inventory-assemblies or Inventory-parts
(to record costs and relieve inventory)

It sounds to me as though you have run into a really wacky way of
doing things. Your client must have some really good JIT delivery if
your client is costing everything upon purchase. It should be costed
at the time of sale.

Beverly
 
T

Tee

Beverly said:
Tara,

All items purchased for eventual resale, whether sold as is or with
further processing, should be a debit to inventory and a credit to
cash or accounts payable.

If items are processed further, direct labor and overhead used to
process these things further is normally added to its value as a part
of COGS called COG manufactured. If direct labor and overhead is
negligible, the inventory can simply be combined into an assembly or
kit (I believe Quickbooks has this feature, but if it doesn't all
parts of the completed item can be individually chosen for COGS) and
then chosen as the inventory item when sold.

Sales should not be debited unless there is a return. An illustration
of the entries used would be as follows:

The purchase:

Inventory-parts
AP or cash
(to record purchase)

If direct labor and overhead are added:

Direct labor
Overhead Items
AP or cash
(to record expense)

Inventory-assemblies
Direct Labor
Overhead Items
Inventory-parts
(to allocate expense to inventory)

Sale:

Cash or AR
Sales
(to record sale)

COGS
Inventory-assemblies or Inventory-parts
(to record costs and relieve inventory)

It sounds to me as though you have run into a really wacky way of
doing things. Your client must have some really good JIT delivery if
your client is costing everything upon purchase. It should be costed
at the time of sale.

Beverly
Thanks Beverly. I have to leave the whacky factor alone for fear of being
unprofessional. I'll just wait and talk to the accountant but will save
these posts. Its possible that the accountant has been making adjusting
entries (or in this case, totally revising the books) for years but not
recording them in the company's QB file. I was given the AJE to make for
2003 but none of the 6 had to do with adjusting the accounts we're
discussing.

The client is very adamant in their ideas about how things should be done
and they have *no* bookkeeping experience. I often hear "this is how I do
it...I want it done..the acct. wants it done" but its entirely possible that
the accountant just lets the client do as they please rather than hash it
out. I do know that the accountant wanted to cry when news came that the
client had finally hired a bookkeeper. Its just really hard to know how to
do things when the current system in place doesn't touch on anything I've
ever seen before.
 
?

_

As I said, the client may be using EITHER a perpetual inventory method OR a periodic method. OR a combination, periodic for materials and perpetual for finished goods.

If you don't know the system, you're on extremely dangerous ground trying to make any changes. Likewise, you'd be on very shaky ground contradicting the accountant - especially during vacation.

Repeat for emphasis: I suggest you wait until the accountant returns.
 
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T

Tee

As I said, the client may be using EITHER a perpetual inventory method OR a
periodic method. OR a combination, periodic for materials and perpetual for
finished goods.

If you don't know the system, you're on extremely dangerous ground trying to
make any changes. Likewise, you'd be on very shaky ground contradicting the
accountant - especially during vacation.

Repeat for emphasis: I suggest you wait until the accountant returns.

-----

I'll wait on the accountant. Its the client who demanded a change *this
week* so that's why the issue came up now. As for shaky ground, the client
who pays me is demanding I effect a change, ignoring the client's demands
doesn't exactly go over well. I'm not trying to get around the accountant
so my position is a catch-22 either way you look at it.
 
?

_

Yes, a difficult position, no question.
Tell the client that you proceeding without the accountant would be similar to removing a kidney blindfolded without an anaesthetic.

Good luck!
 
A

A

Tee said:
Thanks Beverly. I have to leave the whacky factor alone for fear of being
unprofessional. I'll just wait and talk to the accountant but will save
these posts. Its possible that the accountant has been making adjusting
entries (or in this case, totally revising the books) for years but not
recording them in the company's QB file. I was given the AJE to make for
2003 but none of the 6 had to do with adjusting the accounts we're
discussing.

The client is very adamant in their ideas about how things should be done
and they have *no* bookkeeping experience. I often hear "this is how I do
it...I want it done..the acct. wants it done" but its entirely possible that
the accountant just lets the client do as they please rather than hash it
out. I do know that the accountant wanted to cry when news came that the
client had finally hired a bookkeeper. Its just really hard to know how to
do things when the current system in place doesn't touch on anything I've
ever seen before.
I just went through this same situation.. a company with a couple million
dollars (at least) in inventory and expensing everything to COGS when
purchased. I told them they couldn't do that and they told me "it's the way
we have always done it"... I said "See Ya!" I think they also had an
accountant that just "fudged" the numbers at year end instead of trying to
explain it to these morons...
 
J

John

A said:
"...

I just went through this same situation.. a company with a couple million
dollars (at least) in inventory and expensing everything to COGS when
purchased. I told them they couldn't do that and they told me "it's the way
we have always done it"... I said "See Ya!" I think they also had an
accountant that just "fudged" the numbers at year end instead of trying to
explain it to these morons...
they may or may not be morons, some very profitable small business owners
know their inventory without an accountant putting it on the balance sheet,
( but it could be a problem if they are visited by the IRS
 
A

A

John said:
they may or may not be morons, some very profitable small business owners
know their inventory without an accountant putting it on the balance sheet,
( but it could be a problem if they are visited by the IRS
Not in this case.. they have a huge warehouse full of merchandise, so I
asked them "How do you know what you have out there if you don't track your
inventory?" their reply.. "We don't know"
 
T

Tee

A said:
Not in this case.. they have a huge warehouse full of merchandise, so I
asked them "How do you know what you have out there if you don't track your
inventory?" their reply.. "We don't know"
I can relate. This particular client of mine doesn't know their inventory
either and its all right there in front of them (not a huge store). They
probably know about 40% of it but don't count the supplies or ready-made
frames. They could probably tell me a good portion of the artwork that's
there but then since its consignment that's kind of hard to forget. I've
asked that inventory be taken numerous times to no avail.

What's worse is that alot of things are misentered in, or long gone from,
inventory so the list isn't even close to accurate. When something leaves,
its not uncommon to be listed as description A but the item in the computer,
assuming there is one, is described as something totally different. Then to
make matters worse, until I changed things, all consignments were listed as
inventory assets rather than liabilities. They're not assets and there are
no costs associated with them, only profit if they sell, but they were in
the system as if the store owned them.
 
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?

_

Posting purchases to COGS is not inherently or automatically either "wrong" or "stupid" if it's part of a perfectly acceptable method called "periodic inventory accounting" .....
so long as the other parts of the method are also used.
 

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