Inventory accounting is intrinsically tied to accounting for purchases.
When you place a purchase order, the value of the purchase order - i.e. what you pay your vendor - is the same thing as the asset value of the inventory.
One of the benefits of Brightpearl is the fact purchase orders and accounts payable are managed in the same system as inventory and cost of goods sold.
To illustrate the process, here is a typical purchases to inventory to sales process:
Each stage and any associated accounting is described below:
- A purchase order is placed with a vendor
The vendor receives the purchase order, processes it, and ships the goods to you.
- Inventory is received into stock
On receipt of the inventory, asset values increase with a PG (Purchase Goods-in) journal.
The balance sheet will show that you have inventory, but as you don't yet have an invoice from the supplier, there is also a liability against "stock received not invoiced".
- The purchase invoice is received from vendor
Invoicing the purchase order creates a PI (Purchase Invoice) journal.
In this journal, the liability from the "stock received not invoiced" account is transferred to the accounts payable (creditors control) account.
- The inventory is sold
Later, when the same inventory is sold (and you have cost of sales accounting on), a GO (Goods Out) journal is entered to record the cost of goods sold.
This decreases your assets and puts the value onto your profit and loss as a "cost of sales" expense:
If the purchase invoice is received before the inventory, then the "stock received not invoiced" account code is still used, but the transactions appear in a different order - the PI before the PG. The end result is the same.
Important: The accuracy of your bottom line (profit and loss) depends on entering correct asset values for inventory when it's received into stock
Price difference between receiving inventory and invoice
When receiving items into stock on a non-invoiced purchase order, the asset value assigned to the items is taken from the row on the purchase order, with the assumption that is what you will be charged for them.
However if a purchase invoice is received after the goods have been received into stock and item prices have changed, Brightpearl will make accounting corrections to ensure that the overall cost of sales is accurate.
These corrections will balance the difference in value between the asset value of the goods recorded at the time they were received (at the old price) and the asset value they have now using the new price.
This is known as a purchase price correction.
Note that these balancing entries are posted directly to cost of sales and will not update the asset value of the in-stock goods, or the individual cost of sales values for any of the items already sold.
Taking the example above where goods were received in at $10.00:
Say the price was updated to $10.50 once the invoice arrives.
The goods in (PG) will still have a value of $10.00, but when the purchase invoice is received, two journal entries are posted (PI and GO):
The extra $0.50 is placed onto the Cost of Goods Sold account preemptively.
When the items are all eventually sold (with the cost of sales recorded on GO journals), the cost of goods sold will show $10.50: $10.00 from the items selling, and $0.50 from the purchase price correction entry.
When you buy inventory, the net (ex. tax) price paid to your supplier is used as the asset value, which then ends up as the cost of goods sold.
For some businesses, there are significant additional costs such as freight and duty which would normally appear on a separate invoice for another supplier as a general "shipping" expense.
If you prefer to show these costs as part of the cost of sale, you can allocate them to the inventory's asset value using the landed costs feature.