Drop-shipping and accounting

When it comes to accounting for drop-ship purchase orders, there are a few differences from regular purchases orders.

The key difference between drop-ship purchase orders and regular purchase orders is that you don't receive any items into stock from a drop-ship purchase order, so there is no impact to your inventory asset value.

Invoicing drop-ship purchase orders

Drop-ship purchase orders should have a purchase invoice received against them in the same way that regular purchase orders do. 

Nominal codes

Items on drop-ship purchase orders, even if they are stock tracked items, are assigned a purchases nominal code (5XXX) since no items are received into stock. Normally a purchase order for inventory would have an asset nominal code (1XXX).

The purchases code on the purchase order row will be the one defined on the product, unless the vendor has a default nominal code set.

When a purchase invoice is received against a drop-ship purchase order, the net value of the items is added directly to the relevant purchases nominal code, accounting for the cost of goods sold. This means the cost of goods is linked to the purchase order invoice, rather than a goods out journal linked to the sales order.

Invoicing drop-ship sales orders

You will need to invoice drop-shipped sales orders to complete all accounting processes. A sales invoice (SI) journal will be added into accounts, recording the revenue and tax side of the sale.

However, since you didn't carry the stock, there will be no cost of goods sold journal which is normally associated with a shipped goods out note. Instead, cost of goods sold are accounted for when the purchase invoice is received.

Cost tab on sales orders

The cost tab on a sales order shows prices from the cost price list selected for that order, unless items have been allocated or fulfilled from a warehouse, in which case the actual FIFO value of inventory is used.

If you create a drop-ship purchase order for a sale, the purchase order price will only show as the cost value for the sale after the purchase order is invoiced.

Cost vs revenue posting dates

Revenue will be posted to the accounts at the tax date of the sales invoice, and the costs will be posted at the tax date of the purchase invoice.

Be aware of this when you are reporting on profitability of your drop-shipped sales.

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