The cost price of a unit of inventory is set when the unit is received into stock. If the price changes after the unit has been received in, the cost price associated with the unit won't change. Instead, a purchase price correction entry is posted, which posts the difference between the received price and invoiced price directly to the cost of goods sold code.
While the purchase price correction entry makes sure the overall accounting is correct, if the units don't sell in the same month the correction entry is posted, your month-to-month income statement can be misleading. For that reason you may wish to post your own corrections to improve the accuracy of your reporting.
If none of the units have sold, the solution is straightforward - simply unreceive and re-receive the goods, or amend their prices using the inventory detail report.
However, if some (or all!) of the units have sold (or otherwise been removed), the correction can be a little tricky. This guide will discuss how to handle this scenario.
To know how to correct the cost price of inventory which has already sold, it's important to have an understanding of the accounting entries which have already taken place. There are three postings to be aware of:
- The PG entry bringing the goods into stock
- The GO entry posting the purchase price correction entry
- The GO (or IA) entries removing the goods from stock
Let's take an example.
Say you receive 10 units of Product A on PO#1001, at a price of $10 per unit.
The PG entry bringing these units into stock would look like:
|2050 Stock received not invoiced||0||100|
When you receive the invoice, you were charged $10.50 per unit instead.
The GO purchase price correction entry would post as follows:
|5000 Cost of goods sold||5||0|
|2050 Stock received not invoiced||0||5|
Then when the items sell, the GO entry taking them out of stock would post as follows:
|5000 Cost of goods sold||100||0|
Note that this leaves a debit balance of $105 on the cost of goods sold code, which is correct.
However, unless the purchase price correction entry and the cost of sales journal post in the same period, there will be too much cost recorded in one period and not enough in another.
The key to correcting this is to redistribute the purchase price correction into the periods where the item sold.
Posting the corrections
There are three steps to posting the correction entries:
- Posting a journal to reverse the purchase price correction
- Identifying when the items sold
- Posting journals to move the purchase price correction into the appropriate periods
Posting a journal to reverse the purchase price correction
This will be a manually entered journal posting between the cost of goods sold code and a balance sheet code. Which balance sheet code to use is up to you, but it's recommended to set up a new code to avoid making reconciliation of the inventory code or stock received not invoiced code more difficult. Using a new code will also help you keep track of these corrections.
The manual journal should be posted on the same date as the purchase price correction entry (i.e. the invoice date of the purchase order).
Depending on which way the correction goes (as you could invoice goods for either a lower or a higher price than they were received), you will debit or credit the cost of goods sold code, and credit or debit your new inventory code.
Using the example above, the entry would look something like:
|2090 Purchase price correction||5||0|
|5000 Cost of goods sold||0||5|
Identifying when the items sold
The next step is to find out when the items sold, so you know what dates and values to use for the third step.
The easiest way to do this is to use the inventory audit trail, located under Products > Inventory audit trail.
Filter it for the product in question, then look for rows with an SO# reference using the received in price.
So, for example, the inventory audit trail for Product A in the above example may look something like this:
|Product A||-6||10||SO#2383||March 4th 2022|
|Product A||-4||10||SO#1389||February 3rd 2022|
|Product A||-6||9||SO#1347||January 2nd 2022|
|Product A||10||10||PO#1001||January 1st 2022|
You know that Product A was incorrectly brought in for a price of $10 per unit, so you know that the sale on January 2nd is not related to this purchase order.
The sales in February and March sold Product A for a cost price of $10 per unit, and are likely related to the purchase order receiving the goods in. You may need to look for further clues, like checking if any other batches came in at the wrong price and seeing if all the units from those batches have sold.
Once you have this data, you can do some calculations to work out what journals are to be posted. You need to calculate what was actually posted, what should have been posted, and the difference between them.
Using the inventory audit trail, you can see that in February, 4 units sold with a cost price of $10 each. Multiplying it out gives you a cost of goods of $40. You know the price should have been $10.50 each, which means the expected cost is $42. This means the difference between the two costs is $2.
In March, 6 units sold with a cost of $10 each, for a total cost of $60. If they had been received at the correct price, they would have been received in at $63, giving a difference of $3.
Now that you have those figures, you can complete the correction.
Moving the purchase price correction into the relevant periods
The last step is a simple case of posting manual journals to move the values into the correct periods.
In the above case, you would post two entries, one dated in February and one dated in March:
|5000 Cost of goods sold||2||0|
|2090 Purchase price correction||0||2|
|5000 Cost of goods sold||3||0|
|2090 Purchase price correction||0||3|
You'll end up with the costs redistributed into the correct months.