Inventory

[James Kerr]

On Saturday 20 March 2010 Steve Hill wrote:

> I'm trying to do inventory tracking in Gnucash.  I've set up a
>  stock account and can buy items (let's say tins of paint) by
>  transferring money from a bank account to the stock account.
> 
> When I later sell an item, the proceeds of the sale get transferred
>  to the bank account.  The realised gains get pulled in from an
>  income acount.
> 
> I.e. if I buy a tin of paint for £20 then £20 get transferred from
>  the bank account to the inventory account.  If I then sell that
>  tin of paint for £36, £36 gets transferred from the inventory
>  account to the bank account and £16 gets transferred from an
>  income account to the inventory account in order to account for
>  the realised gain.
> 
> So far so good.  However, I don't understand how to invoice for
>  inventory that people have purchased.  Since only the gain (£16)
>  comes from an income account, how do I invoice for the full cost
>  of the paint (£36), which is what the customer will be paying?
> 

Cash sale:

Bank:   Debit (Deposit) £36
Sales: Credit (Income) £36
Cost of goods sold: Debit (Expense) £20
Inventory: Credit (Decrease) £20

Invoice:

Accounts Receivable: Debit (Increase) £36
Sales: Credit (Income) £36
Cost of goods sold: Debit (Expense) £20
Inventory: Credit (Decrease) £20

When the invoice is paid:

Bank:   Debit (Deposit) £36
Accounts Receivable: Credit (Decrease) £36

(The Debits always go in the left-hand column and the Credits in the 
right-hand column in the ledger.)

Your gross profit (or loss) is the difference between Sales and Cost 
of goods sold.

Instead of recording the Cost of goods sold (and the reduction in 
inventory) when each sale is made, an alternative is to calculate the 
Cost of goods sold, only at the end of the period by valuing the 
inventory at the end of the period (doing a "stock-taking"). The 
difference between the amount of the inventory  in the ledger and the 
cost of the inventory on hand is the amount of the Cost of goods sold, 
which would then be entered as an increase in expense and a reduction 
in inventory.

The method chosen for recording the cost of goods sold would usually  
depend on the variety and number of items in the inventory, the values 
of individual items and the frequency of sales.

Jim