accounting for "sold" inventory

[David Cousens]

Hi Jay 

 

Maf is right.

 

You normally create an expense account Cost of Goods Sold (CoGS) and you
have an Asset  account Inventory.  When you make a sale of an item for $50
whose cost is $10, your Accounts Receivable AR is debited by $50, your Sales
Income account is credited by $40 and the CoGS   Expense account is credited
by the "cost"  of the item $10, i.e.  a split in GnuCash terms. CoGs is
normally treated separately from your other expenses as it accounts for the
costs associated with the goods you sell and records both the direct costs
(purchase price, materials,  labour etc.  ) and  indirect costs
(administrative and utility costs  and business overheads (repairs ,
maintenance, capital investment etc.)). 

 

These are normally also added into the costs of your inventory to provide an
accurate valuation of your inventory. How this is done depends on the exact
nature of your business, and the regulatory and taxation environment in
which your business operates and is best addressed by consulting your
accountant.  Your general running expenses usually contribute to the
overhead costs of the inventory  where you are simply reselling an item and
are incorporated in the margin of your selling price over the purchase price
of the goods sold (and also determine what your margin should be, i.e.  SP=
PP +OH +Profit). Where you are modifying an item for sale the direct costs
include labour and materials as well as the purchase price).  It is worth
emphasizing that correctly accounting for your costs will allow you to
control your profitability. If the true costs are not factored in then your
margin will be too low or at least lower than you expect. 

 

GnuCash does not currently  have a full  inventory management system ( see
http://wiki.gnucash.org/wiki/Inventory_Handling,
http://lists.gnucash.org/pipermail/gnucash-user/2012-April/044360.html ) so
you would have to manually record the entries to the CoGS account as a debit
to the sales account and a credit to the COGS account for each transaction
and maintain a list of inventory items and cost and selling  prices manually
in a spreadsheet.  I am a relative newbie in Gnucash but have used inventory
management in other products

 

You usually close the CoGS account to the Inventory account periodically
(weekly, monthly  or quarterly  as required by your business needs (
turnover, sales rate, reporting requirements etc.) by debiting the COGS
account by its balance and crediting the same amount to the Inventory
account which reduces its balance as items are sold. This records the change
of inventory in the inventory account.  A purchase of an inventory item is a
debit to your an Inventory account and a credit to your Bank account or AP
account depending upon whether it is a cash purchase or credit purchase. 

 

(Debit and credit are used here as defined in double entry accounting
practice which is more complex than the simple concept of a debit being a
decrease in an account and a credit being an increase in an account balance
(only true for equity, liability and income accounts and reversed for asset
and expense accounts). The usage in accounting facilitates the detection of
some types of errors  (as they result in an imbalance in the account balance
sheet) and also facilitates the correct measurement of the equity and
changes in the equity, the profit and loss and the cash flow in your
business. My apologies if this is already familiar.)

 

Your only other hassle is how to deal with changes in price for your
inventory (and overhead costs) when you make new purchases which may be at a
different price from previous or future purchases. There are a variety of
methods for doing this based on either  FIFO (first in first out), a cost
averaging  or LIFO (see a book on cost accounting e.g. Hansen and Mowen,
Cost Management Accounting and Control and talk to your accountant). This
would have to be implemented externally in a spreadsheet or other software.

 

David Cousens