Tracking material assets prior to sale

[John Ralls]

On May 29, 2014, at 2:31 PM, John Ruemker wrote:

> I'm very new to GnuCash, so apologies if I'm missing some basic concepts.  I'm trying to learn the ropes for potential use with a small home business.
> 
> I know GnuCash doesn't do inventory tracking and that's not really what I'm after, but I do want the ability to track materials and unsold merchandise as assets until sales are made.  For example, large batches of raw materials are purchased in one transaction, kept on hand while slowly converted into sellable product, and those products are transferred to the customer upon sale.  But I'm having trouble wrapping my brain around how this should work.
> 
> When the initial purchase of materials is made, that's simple enough: a split transaction from Assets:checking (or wherever) to Assets:Materials and the rest to Expenses:Taxes and other categories for expenses outside of what we're retaining as assets.  Then as materials are converted into product, transfer the value from Assets:Materials to Assets:Merchandise.  Here, it seems like tracking the value of the product in terms of sale price as opposed to material cost would make the most sense, but then the transfer from Materials to Merchandise is not equal.  Where does the additional amount pull from? So maybe then I just leave it as the material cost in the merchandise account?
> 
> And then I get ever more lost at the sale.  I would invoice and send it to accounts receivable and process the payment to Assets:checking (or wherever), but then what do I do with the value in Assets:merchandise?  Transfer it to an Expenses account?   Is there no way as part of invoicing or processing payment to reflect that it covers the transfer of a certain amount of assets?
> 
> Thanks for helping a n00b.


Just focusing on the manufacturing part, it's a bit more complicated than that, because you have other inputs -- labor, energy, overhead, etc. -- that must be included in the costs. Unless the manufacturing  process is very simple and is generally completed in a day or so, you want to cost the process in stages and value the inventory, called WIP, or "work in process", at each stage as well as value your finished goods inventory. Note that inventories are always valued at cost.

You mentioned tax expense on raw materials purchase. I think that's probably wrong. In the US materials bought for resale, whether directly or for incorporation into another product, are generally exempt from sales tax, and other taxes paid on that sort of material would be capitalized into the cost of the materials rather than immediately expensed. I'm not familiar with the rules in VAT/GST countries, but I suspect that the VAT paid must be capitalized, probably in a sub-account to the  Assets:Inventory:Raw Materials account.

All of that is called "cost accounting".

The selling part is accounted for separately, as are other costs; they're usually broken out as Selling, General, and Administration, and Tax.

GnuCash has no direct support for any of this, not even a sample chart of accounts. If you want to use GnuCash you'll first have to learn how to do it on paper and then transfer that method to GnuCash. Depending on the complexity of your business it may make more sense for you to use one of the FOSS Enterprise Resource Planning (ERP) programs, which do have direct support as well as providing many other facilities that you'll find useful for running a manufacturing business.

Accounting for a manufacturing business is pretty complicated and it looks like you're starting from at best very basic understanding of accounting, so I think you need to get some advice from a licensed accountant with specific experience in manufacturing. That person can help you set up a system that makes sense for your business, recommend books or courses so that you have the necessary skills to maintain the system yourself, and perhaps most important prevent you from getting in trouble with the tax folks.

Regards,
John Ralls


Regards,
John Ralls