Startup questions for new business

[Robert Locke]

On Tue, 2004-11-09 at 06:42, Maf. King wrote:
> On Tuesday 09 Nov 2004 06:06, tufkal wrote:
> 
> >
> > 3) I bought an item at a local store and resold it.  I entered the item as
> > an expense from Asset:Checking->Expense:Inventory.   Then I got paid for
> > the job I did, which was parts and labor.  $80 in labor and $99.99 in
> > parts.  The expense of the part was $69.99.  How do I correctly recieve
> > the money against the invoice, paying the Inventory account off and
> > showing a profit?  Basically, how do I process inventory (no tracking
> > needed), just the cost/profit.
> 
> Hi  Tufkal.
> 
> Right - I've done some thinking and tinkering in GC.  once again, IANAA, and 
> this is all based on my experience and understanding of UK accounting 
> principles. YMMV.
> 
> I _think_ that if you want to process inventory in the way you describe above, 
> then inventory is an asset, not an expense.  
> 
> 1.) You buy the item, and it is not an expense, it is a transfer from 
> checking -> asset:inventory
> 
> Your net worth hasn't changed, instead of $100 cash at bank, you now have $30 
> cash, and inventory worth $70 (I'll round the .99, if that's ok with you!)
> 
> 
> 2.) you receive a cheque for $180 for the work done.  this is deposited in 
> your checking account.  (I'll keep it simple and not involve the A/R section 
> of gnucash here)
> This transaction is recorded as a split in the bank register - 
> Checking  CR 180
> Assets:Inventory	DB 70
> Income:Invoice	DB 110
> 
> That way, Inventory hits £0, income is shown as £110, bank balance is £210, 
> profit is shown as $110
> 
> Does that show you what you want?
> 
> Maf.
> 
As I recall setting up CoA in my old accounting class, there is actually
another expense category known as Cost of Goods Sold.

So, when you buy the inventory, yes, it is a transfer of Assets, reduce
Asset:Checking and increase Asset:Inventory.

Of course, it may also use an Account Payable Liability account in the
middle too.  When you receive the "inventory" you simply promise to pay
some cash for the item.  So receipt of inventory is an increase to
Asset:Inventory and an increase to Liability:Accounts Payable.  Then
when you pay the bill you decrease Liability:Accounts Payable and
decrease Asset:Checking.

Now you want to sell the item, so you receive income.  When I bill and
deliver the product, say $80 in service and $100 in product where the
product is in inventory valued at $70, I increase Asset:Accounts
Receivable the total of the invoice $180, and increase Income:Service by
$80 and increase Income:Product by $100.  Since I delivered the product
I decrease Asset:Inventory by $70 and increase Expense:COGS by $70. 
When I am paid, I decrease Asset:Accounts Receivable by $180 and
increase Asset:Checking by $180.

Of course, now I can get reports that show great profit in labor of $80,
but I can also see the "profit" in product sold of $30, by taking
Income:Product minus Expense:COGS, my overall profit will be $110 when
taking all Income accounts minus all Expense accounts.....

HTH,

--Rob