INVENTORY ACCOUNTING  (in Quickbooks and ERPlite)

 

1.0 Overview

 

Businesses that deal in inventories  - either manufacturing, distribution or retailing – face special issues not faced by service industries.

 

Choices of Inventory System

 

1. Perpetual
2. Periodic

 

Choices of Valuation Technique

 

1. LIFO
2. FIFO
3. Average

 

This tutorial will describe how these choices can be used with ERPlite and Quickbooks.

 

2.0 Average Cost Inventory Valuation in QB

 

Quickbooks uses the Average Cost technique(ie LIFO or FIFO are not handled).

 

ERPlite provides Inventory Valuation Reports for : standard cost(for manufactured and purchased items, average cost(for purchased items) and current cost(for purchased items). 

 

ERPlite could be easily customed to provide LIFO or FIFO inventory  valuation, and thus allowing QB to be used for LIFO/FIFO valuation.

 

ERPlite average and current costs are computed from PO’s. Thus, it is recommended that the standard cost based inventory valuation be used to transfer “average costs” to QB for manufactured and purchased items.  Transfer of standard costs to QB must be done manually.

 

Average Cost =  Direct Materials + Direct Labor + Factory Overhead

 

Direct Materials   = purchase price and all expenditures incurred in aquiring such merchandise, such as transportation, customs duties and insurance against losses in transit.  In ERPlite, this cost is labelled standard cost.

 

 

ERPlite provides two fields for capturing inventory costs: standard cost and overhead cost. 

 

Standard cost of a purchased item = Direct Materials cost (as defined above).

 

Standard cost of a manufactured item = the rolled up sum of purchased parts standard cost(Direct Materials). 

 

Note that ERPlite provides report s  for computing the rolled up cost of a manufactured item, but it does not automatically update the standard cost.

 

Overhead cost =  Direct Labor + Factory Overhead.

 

3.0 Perpetual Inventory System

 

NOTE: the perpetual inventory system can be used with ERPlite v4350 and later.

 

• Items in QB are classified as inventory.
• The transfer of Bills and Invoices from ERPlite result in inventory count /COGS(Cost of Goods Sold) adjustments in QB.
• Requires more record keeping than does periodic system, which motivates the majority of manufacturers to use the periodic system.
• More common recently because of barcode scanners.
• Provides continual information regarding what was sold, where and when it was sold, at what price and the COGS.
• A periodic inventory count – typically annually- is still necessary.
• The actual count at year end will likely be lower, due to stolen, lost, destroyed inventory.
• The periodic adjustments must be done directly in  QB via  Inventory adjustments or  Journal Entries.
• Upon each Sale: Debit cash (or accounts receivable) and credit revenue; Debit COGS and credit Inventory

 

3.1 Perputual System Implementation

 

• Declare all items as “Inventory” in QB.
• ERPlite will transfer Items and Transactions as “non-inventory” but QB will treat the transfer as inventroy.

 

 

4.0 Periodic Inventory System

 

Note: the periodic inventory system can be used in all ERPlite releases.

 

• Does not keep track of inventory, except periodically.
• No entry  affecting inventory as a result of individual purchases or sales.
• Cannot distinguish between goods sold and goods stolen, lost or destroyed.
• Keeps track of what you started with, what you purchased, and what you ended with.
• Basic Formula : Beginning Inventory + Purchases – Ending Inventory =  COGS
• Upon each Sale: Debit cash (or accounts receivable) and credit revenue
• Periodically:  Debit COGS and credit Inventory

4.1 Periodic System Implementation

 

• Declare all items as “non-Inventory” in QB.   This will have a side benefit, that QB will not generate the “you don’t have enough inventory” message on invoice creation.

 

 

 

 

5.0 Which System is Better?

 

·        If your business can affor a bar-code scanning system, perpetual is probably better: more accurate, more timely information.

·        For many small businesses, keeping full detail track of each item sold is unrealistic

·        The two methods result in the same ultimate cost numbers.