Setting up an Inventory Asset Account

[Andrew Sackville-West]

On Wed, Nov 01, 2006 at 06:36:07PM -0600, Dale Alspach wrote:
> This is not an expense, but a transfer between assets. If you are
> selling the inventory, you should have a cost of goods sold account.
> 
> Buy 100 widgets at $10 each. Inventory debit $1000, checking credit $100.
> 
> Sell widget for $13. Income credit $3, Inventory credit $10, Cost of Goods
> Sold debit $10, checking debit $3.

I don't think that's right because if you sell the widget for $13,
then you've got $13 coming into your checking account...

How about:

Income credit $13, checking debit $13
Inventory credit $10, COGS debit $10.

that way your income - COGS = $3, the gross profit. Your way
says income - COGS = -$7 which is not the case.

> 
> I hope an accountant will clarify this but Cost of Goods
> Sold is a special expense account I believe since it is not really an
> operating expense.

IANAA, but as I understand it you are correct. A typical chart of
accounts will have various top-level income accounts, a top-level set
for COGS, and a top level set for "Operating Expenses". I think the
reasoning is that Income - COGS = gross profit and thus they belong at
that level. everything else is "overhead" or operating expenses. 

I don't think it matters that much though. The accountant always
charges the same amount anyway ;)

A
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