simple inventory question

[John Ralls]

On Jun 10, 2014, at 4:13 PM, wireless <wireless at tampabay.rr.com> wrote:

> Hello,
> 
> I understand that gnucash does not have inventory systems. However, we occasionally sell to (tax exempts) agencies a few items, maybe once a year.  So a few years back when the gnucash was setup for this
> small business, we created an account and called it inventory under COSTS. When we have received a PO from a company to purchase something from us, we go out an buy it. Inventory is never kept, it only  exists in a temporary mode.
> 
> There was probably a better way to do it, but, this is what I did; purchased (item A) 3 times  at a cost of 1K  each and coded the credit card transaction to the inventory account: [COSTS (Expenses) Inventory]
> The three times we sold Item A and received a check payment for 2K each time, it was linked in the check book to [Revenue (income)  exempted sales]. So (3) one K expenditures and (3) sales events of 2K for a total
> sales of 6K.
> 
> So the account for inventory shows 3K in 3 items, like we are still are
> in possession of these items. This seems like a problem?   The first 2 sales event occurred in previous tax year 2012. For tax year 2013, we had this sales event once. The inventory show 1K in inventory  under
> Expenses (Costs) Inventory. When I go to the master accounts listing file and click on "inventory" I see all three purchases for a total of 3K. Likewise in the account Revenue (income) the exempt sales shows 6K. I'm not sure this is a problem? If so, how would I fix it?
> 
> 
> For use we need to somehow link the inventory account so it shows a zero balance, as the inventory is gone (has been sold); or at least to me this seems how it should be. I'm not an accountant, so maybe I just
> need an education on gnucash, and some helpful pointers?
> 
> 
> Comments and ideas are most welcome.
> 

No, you need an education on bookkeeping. Go get a book. This is something you can get in trouble for, so either learn how to do it right or hire someone who already knows to do it for you.

Your problem is pretty simple: Inventory is an Asset, not an expense. As long as you don’t carry the inventory from one accounting period to the next, you could just change the name of the account from Inventory to Cost of Goods Sold. For what you’re doing there’s no good reason to do it the “right” way unless you’re carrying the inventory. By calling the Expense account “Inventory” you’re expecting it to reflect the value of what you’re holding, but that’s not what expenses represent.

The official, legal way to do it is to have an ASSET account named Inventory. When you buy something for resale, book it as a transfer from your cash account to Inventory. The value of the company hasn’t changed in this transaction, just the form of that value. When you sell the item, you transfer the value from inventory to Expenses:Cost of Goods Sold. The receipt of payment goes to Income:Sales; we hope that you’re selling at a profit, so the value of the company increases by the difference between the cost of goods sold and the sale.

Regards,
John Ralls