Accounting for inventory

Brightpearl will automatically create all accounting for inventory. This article explains the inventory costing method used by Brightpearl and how each accounting journal is created to represent each inventory movement made in the product/inventory module.

Inventory costing method - FIFO

Brightpearl uses the FIFO (First In First Out) method of valuing inventory. This means that the items added into stock first will be sold first. Financially, this means that for each sale the profit margins are calculated using the value of the oldest item in stock. For example:

10 items are purchased at $10 each, then another 5 of the same item are purchased at $15 each.

  • In stock quantity = 10 + 5 = 15 items
  • In stock value = (10 x $10) + (5 x $15) = $100 + $75 = $175

Then 12 items are sold. Using the FIFO method the oldest items are removed first, that's the batch of 10 at $10 and then 2 from the second batch at $15.

  • 10 x $10 = $100
  • 2 x $15 = $30
  • Total value removed from stock = $130
  • Total value remaining in stock = 3 x $15 = $45

Using cost of sales accounting

When cost of sales accounting is switched on in Brightpearl all accounting for inventory will be made automatically as inventory movements occur. Cost of sales is accounting for on a per item basis allowing a detailed profit analysis down to an individual product.

When cost of sales accounting is activated in Brightpearl, accounting for inventory will be created at the following times - you can learn more about how the accounting journals are created later in this article:

For sales:

  • Shipping items on a sale (cost of sales)
  • Receiving inventory on a sales credit (returns)
    • Add into the warehouse
    • Place in quarantine
    • Write-off

For purchases:

  • Receiving items on a purchase
  • Unreceiving items on a purchase
  • Receiving the purchase invoice with a price correction

For corrections:

  • Adding or removing stock items
  • An inventory price correction is made

The following processes will never create any accounting entries:

  • Transferring items between warehouses
  • Moving items between warehouse locations

Cost of sales accounting is activated at Settings > Company > Accounting: Options.

Switching off cost of sales accounting - periodic inventory accounting

Cost of sales accounting can be switched off in Brightpearl if you prefer to use a periodic method of accounting for inventory. When cost of sales accounting is deactivated no accounting for inventory will be automatically created - a manual journal will need to be entered manually for each period.

To calculate your periodic inventory values take the difference between opening and closing stock, taking into consideration any purchases. 

Accounting journals - shipping / cost of goods sold

Each time items are marked as shipped they will be removed from stock and the cost of goods sold accounting journal will be created.

These types of journals are always in base currency.

There are two settings which affect the date and accounts used on a cost of goods sold journal. These settings allow cost of goods sold at the point the items are shipped or on the same date as the revenue is recognized. Find these options at Settings > Company > Accounting: Options.

  • Use invoice date as posting date for cost of goods sold (for orders invoiced before shipping)

    When ON the cost of goods sold journal will be posted to accounting with the same date as the invoice.

    When OFF the cost of goods sold journal will be posted to accounting with today's date.

  • Defer cost of sales for orders shipped not invoiced (for orders shipped before invoiced)

    When ON the cost of goods sold journal will be posted to accounting right away and with today's date, however, the value will be recorded in a "deferred cost of goods" account code. When the items are invoiced this value will be moved cost of goods sold with an additional journal with the same date as the invoice.

    When OFF the cost of goods sold journal will be posted to accounting with todays date and straight to cost of goods sold.

Learn more about how these settings affect financial reporting

acc-jan-ship header

acc-jnl-ship_cogs-rows

Where multiple items are within the same shipment, each goods-out note row results in two journal rows as described above.

When cost of goods sold is deferred at point of shipping, an additional journal is created at the point the order is invoiced. This will move the deferred amount to the relevant cost of goods sold account.

acc-jnl-defcogs-header_0

acc-jnl-defcogs-rows.

To understand the affect of these settings on journals, use the decision tree below:

COGS-rules.

Accounting journals - receiving inventory on a sales credit (return)

Each time inventory is received on a sales credit (return), the items can be either added back into stock, placed into quarantine or written off. In each case the accounting for inventory will be automatically created. All return options will add the items back into stock and increase assets, only the write-off option will create a second journal to then remove the items from stock and decrease assets.

These types of journals are always in base currency.

/acc-jnl-return-header_0

acc-jnl-returnSC-rows

If items are received back on a sales credit and written off, the items are first added into stock (as above) and then an additional journal is created to account for the write-off and removal from stock:

acc-jnl-returnWO-header_2

acc-jnl-returnWO-rows_1

Accounting journals - receiving inventory on a purchase

Each time inventory is received on a purchase order the items will be added into stock and an accounting journal will be created to increase assets.

These types of journals are always in base currency.

acc-jnl-receivePO-heade

acc-jnl-receivePO-rows

Where multiple items are received at the same time, each goods-in row results in two journal rows as described above.

When inventory is received into stock the opposite accounting entry is always made to "Stock Received Not Invoiced". This account is also used when the purchase invoice is received. Once both the inventory and invoice have been received the "Stock Received Not Invoiced" account will have a zero balance for the order.

If the purchased items have been allocated landed costs, those costs will be accounted for within the PG journal created at the point the items are received into stock.

acc-jnl-PGlandedcosts-rows_2

Landed costs allocated after the items have been received into stock will be accounted for as an adjustment using journal type LC. See Accounting journals - landed costs.

Accounting journals - unreceiving items on a purchase

When items are unreceived on a purchase order the items will be removed from stock and an accounting journal will be created to decrease assets. The entries reverse the accounting that was created when the items were received into stock. Note that unreceiving items on a purchase order differs from a stock correction since the items can be received against the order again.

These types of journals are always in base currency.

acc-jnl-unrecPO-header

acc-jnl-unrecPO-rows_0

Where multiple items are unreceived at the same time, each goods-in row deleted results in two journal rows as described above.

Where items have been allocated landed costs, this will also be reversed. If the items are received into stock again, the landed costs will be assigned once more.

acc-jnl-unreceiveLC-rows

Accounting journals - purchase price corrections

When items are received into stock the asset value is the item price on the purchase order at that point in time. When the purchase invoice is later received the price may need to be corrected to match the invoice. Any change to the item price will result in an accounting correction being made to make the necessary adjustments for the difference, since the item was added into stock at an incorrect value.

These types of journals are always in base currency.

Note that the price correction will be posted directly to cost of goods sold and will not update the item value in stock. Once the items are sold the overall correct cost of goods sold will be reported for the sale.

This example describes a price increase. For a price decrease the debits and credits are switched.

acc-jnl-POpricecorrection-rows.

Where multiple items on the purchase have price corrections, each order row results in two journal rows as described above.

acc-jnl-POpricecorrection-header

Accounting journals - inventory level correction

Inventory corrections can be made one item at a time, or in bulk across all products after a stock take by using an import.

These types of journal are always in base currency.

acc-jnl-stockcorrection-header

When adding stock:

acc-stockcorrectionadd-rows

When removing stock:

acc-jnl-stockcorrectionremove-rows

Accounting journals - inventory price correction

Any updates made to the price (value) of items in stock will automatically post accounting adjustments.

These types of journal are always in base currency.

acc-jnl-stockcorrection-header

This example demonstrates the debits and credits for a price increase.

acc-jnl-pricecorrection-rows_0

Accounting journals - inventory level correction

Inventory corrections can be made one item at a time, or in bulk across all products after a stock take by using an import.

These types of journal are always in base currency.

acc-jnl-stockcorrection-header.

When adding stock:

acc-stockcorrectionadd-rows

When removing stock:

acc-jnl-stockcorrectionremove-rows

Accounting journals - inventory price correction

Any updates made to the price (value) of items in stock will automatically post accounting adjustments.

These types of journal are always in base currency.

acc-jnl-stockcorrection-header

This example demonstrates the debits and credits for a price increase.

acc-jnl-pricecorrection-rows

Accounting journals - landed costs

Landed costs can be allocated to items on purchase orders before or after they have been received into stock, but they must still be in stock. All the accounting for landed costs will happen automatically when the items are received into stock on a purchase, or when the landed costs are allocated to items already in stock. Different journals are expected depending on whether landed costs are allocated before or after the goods have been received into stock - the accounting can only be generated on the information known at the time, and adjustments are made for costs allocated later.

Note that once items have been sold all of the inventory and cost of goods sold accounting has been posted in Brightpearl. Landed costs for sold items will need to be manually entered into accounting.

Where landed costs have been allocated to on-order items the accounting for the charges will be included in the PG journal created when the items are received into stock. See Accounting journals - receiving inventory

Landed costs allocated later, to items which have already been received on the purchase order, are accounted for as an adjustment since the original cost price of the stock has already been accounted for.

acc-jnl-landedcosts-header.

acc-jnl-landedcosts-rows

Have more questions? Submit a request

0 Comments

Please sign in to leave a comment.