Difference between revisions of "Inventory Valuation"
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There is no accounting consequence - only a legal consequence of placing the order. | There is no accounting consequence - only a legal consequence of placing the order. | ||
| − | == Receiving the Widgets == | + | === Receiving the Widgets === |
A receipt of inventory is recorded as a "Material Receipt". | A receipt of inventory is recorded as a "Material Receipt". | ||
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Comment - If balance date fell at this point in time, we would need to look to the purchase contract to see who had the title to the goods. In most contracts, title doesn't pass until the goods are paid for and hence we may not be entitled to the future economic benefit of these goods. In a pure technical sense, perhaps the goods should be put in to a special account that recognises that the title to the goods have not passed to the purchaser. | Comment - If balance date fell at this point in time, we would need to look to the purchase contract to see who had the title to the goods. In most contracts, title doesn't pass until the goods are paid for and hence we may not be entitled to the future economic benefit of these goods. In a pure technical sense, perhaps the goods should be put in to a special account that recognises that the title to the goods have not passed to the purchaser. | ||
| − | == Receipt of the Purchase Invoice == | + | === Receipt of the Purchase Invoice === |
DR Inventory Clearing (COGS) 1000 | DR Inventory Clearing (COGS) 1000 | ||
DR Tax Due (Current Liability) 175 | DR Tax Due (Current Liability) 175 | ||
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The accounts payable is correct as we now have received the goods and hence have an obligation to pay the supplier. This is currently offset by the "Not Invoiced Receipts" account. | The accounts payable is correct as we now have received the goods and hence have an obligation to pay the supplier. This is currently offset by the "Not Invoiced Receipts" account. | ||
| − | === Discounts related to Early Payment === | + | ==== Discounts related to Early Payment ==== |
The Tax recognises the Input Credit we are entitled to tax base amount. Under UK VAT law, if a payment or an unconditional discount was offered on the goods then the tax base would be the amount including the discount. So for example, in the case above, if a 2% discount was offered for early settlement then the tax base amount is 980 and the VAT amount should be 171.50. | The Tax recognises the Input Credit we are entitled to tax base amount. Under UK VAT law, if a payment or an unconditional discount was offered on the goods then the tax base would be the amount including the discount. So for example, in the case above, if a 2% discount was offered for early settlement then the tax base amount is 980 and the VAT amount should be 171.50. | ||
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In the UK, the converse is also true, so if you offer a discount for early payment when you invoice your customer, you should calculate VAT only on the discounted amount. This needs to be worked in to the tax calculation on orderline, invoiceline and over the entire invoice. i.e. where tax is calculated on the line basis it must be modified for any discounts provided in payment terms. | In the UK, the converse is also true, so if you offer a discount for early payment when you invoice your customer, you should calculate VAT only on the discounted amount. This needs to be worked in to the tax calculation on orderline, invoiceline and over the entire invoice. i.e. where tax is calculated on the line basis it must be modified for any discounts provided in payment terms. | ||
| − | === Price change between when the goods were ordered and when the are invoiced === | + | ==== Price change between when the goods were ordered and when the are invoiced ==== |
If there was a price change between the purchase order price and when the invoice is received then this creates an Invoice Price Variance (IPV) | If there was a price change between the purchase order price and when the invoice is received then this creates an Invoice Price Variance (IPV) | ||
| − | === What if the material receipt happens without a purchase order? === | + | ==== What if the material receipt happens without a purchase order? ==== |
In the previous example we assumed that the purchase price came from the purchase order. In some scenarios it is possible that a purchase order has not been raised and we merely want to receipt goods in to stock (ready for an invoice at some point in the future). | In the previous example we assumed that the purchase price came from the purchase order. In some scenarios it is possible that a purchase order has not been raised and we merely want to receipt goods in to stock (ready for an invoice at some point in the future). | ||
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The variance between the "cost" and the supplier invoice is later recorded as the IPV. | The variance between the "cost" and the supplier invoice is later recorded as the IPV. | ||
| − | === What if the material receipt is not linked to the purchase order? === | + | ==== What if the material receipt is not linked to the purchase order? ==== |
Comment: The "Inventory Clearing" is currently in the P&L, the first transaction in the process being a DR which means that we are charging our P&L the cost of the goods - even if they are not sold. If balance date were to fall before the matching process we would have a net effect DR 1000 COGS (Inventory Clearing) and CR Liabilities (Not Invoiced Receipts) 1000 in the accounts. I believe that we should make this account somewhere in the Current Liabilities space to correct this. | Comment: The "Inventory Clearing" is currently in the P&L, the first transaction in the process being a DR which means that we are charging our P&L the cost of the goods - even if they are not sold. If balance date were to fall before the matching process we would have a net effect DR 1000 COGS (Inventory Clearing) and CR Liabilities (Not Invoiced Receipts) 1000 in the accounts. I believe that we should make this account somewhere in the Current Liabilities space to correct this. | ||
| − | == Matching the Purchase Invoice == | + | === Matching the Purchase Invoice === |
DR Not Invoiced Receipts (Current Liability) 1000 | DR Not Invoiced Receipts (Current Liability) 1000 | ||
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I think in an IFRS world, it might be difficult to justify costing methods Average PO, Last PO, LIFO (based only on their name) and I'd like to have a closer inspection of Last Invoice, Average Invoice, FIFO, and standard cost. | I think in an IFRS world, it might be difficult to justify costing methods Average PO, Last PO, LIFO (based only on their name) and I'd like to have a closer inspection of Last Invoice, Average Invoice, FIFO, and standard cost. | ||
| − | == Paying the purchase invoice == | + | === Paying the purchase invoice === |
Revision as of 01:38, 18 July 2007
Contents
Summary
PAGE STATUS is ALPHA - I am still working on this.
This page looks specifically at Inventory Valuation and how this is recorded in the Purchase Process of Adempiere.
In compiling the information in this page, the following references have been used:
- IAS2 - Inventories (International Financial Reporting Standard)
- HMRC BIM33132 - Stock: valuation: International Accounting Standard (IAS) 2 Inventories (UK
- HMRC 700 VAT Guide s7.3.2b - VAT on Discounts
Some of these sources, specifically the VAT information is UK specific and hence may vary from country to country.
Purchase Transaction
IAS2 - Inventories
International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) provide a framework for the basis of preparation and presentation of accounts. These standards have been adopted in over 70 countries and are applicable predominantly to external report users (Financial Accounting).
Specifically, IAS2 - Inventories is applicable to inventories, their recognition, valuation and de-recognition.
Inventories are assets (future economic benefit) held for sale in the ordinary course of business in the process of product for sale or in the form of materials or supplies to be consumed in production or rendering services. (IAS2.6)
Industry Exclusions
IAS2 does not apply to the following specific industries:
- work in progress arising under construction contracts, including directly related service contracts (see IAS 11 Construction Contracts) IAS2(a)
- financial instruments (see IAS32/IAS39) IAS2(b)
- biological assets related to agricultural activity and agricultural products at the point of harvest (see IAS 41 Agriculture) IAS2(c)
- producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well-established practices in those industries. IAS3(a)
- commodity broker-traders who measure their inventories at fair value less costs to sell. IAS3(b)
Determining the cost of the Inventory Asset
In addition, it is important to understand what is included in the cost of the inventory asset:
- purchase price
- import duties & taxes to the extent that they are not recoverable (i.e. excludes Value Added Taxes)
- transport
- handling
- other costs directly attributable to the acquisition of finished goods, materials or services
- but deducting any trade discounts or rebates
Example
I will use the following example proposed by Colin Rooney in this thread http://sourceforge.net/forum/forum.php?thread_id=1738341&forum_id=611161 to discuss the inventory and VAT consequences.
In summary, we purchase 1000 units of widgets @ $1.00 per widget at X0. We then buy another 1000 units of widgets at $3.00 per widget at some date prior to the X1 balance date. At some time during X0 - we shall say X0.n we sold 1000 widgets at $2 per widget.
I am assuming that we are in the UK selling to another UK business and widgets are not electronic services.
Raising the Purchase Order
There is no accounting consequence - only a legal consequence of placing the order.
Receiving the Widgets
A receipt of inventory is recorded as a "Material Receipt".
DR Product Asset (Current Asset) 1000 CR Not Invoiced Receipts (Current Liability) 1000 Receipt of 1000 widgets at $1 each
Adempiere bases the cost price on various figures depending on the costing method attached to the accounting schema. e.g. Average Invoice, Average PO, FIFO, Last Invoice, Last PO Price, LIFO or Standard Costing.
IAS2.21 specifccally allows the use of Standard Cost or the Retail Method to approximate cost as long as standard costs take in to account the normal level of materials and supplies, labour, efficiency and capacity utilisation and these are regularly reviewed.
Ademepiere does not support the Retail Method as at 18-07-2007.
A discussion of costing methodologies including the Retail Method is documented elsewhere.
The purpose of the 'cost price' used in the calculation is to determine the difference between the "recognised cost" and the "price invoiced".
Comment - If balance date fell at this point in time, we would need to look to the purchase contract to see who had the title to the goods. In most contracts, title doesn't pass until the goods are paid for and hence we may not be entitled to the future economic benefit of these goods. In a pure technical sense, perhaps the goods should be put in to a special account that recognises that the title to the goods have not passed to the purchaser.
Receipt of the Purchase Invoice
DR Inventory Clearing (COGS) 1000 DR Tax Due (Current Liability) 175 CR Accounts Payable (Current Liability) 1175
The accounts payable is correct as we now have received the goods and hence have an obligation to pay the supplier. This is currently offset by the "Not Invoiced Receipts" account.
The Tax recognises the Input Credit we are entitled to tax base amount. Under UK VAT law, if a payment or an unconditional discount was offered on the goods then the tax base would be the amount including the discount. So for example, in the case above, if a 2% discount was offered for early settlement then the tax base amount is 980 and the VAT amount should be 171.50.
The second part of the journal would be:
DR Accounts Payable (Current Liability) 4.50 CR Tax Due (Current Liability) 4.50
We can only know the credit terms when we receive the invoice from the supplier. Before that point, even with a supply contract, we may not be entitled to the early payment discount. Furthermore, even if we do not pay within the early period to get the discount, the VAT calculation still stands. I would be interested in updating this section on variations to this practice in our EU countries.
In the UK, the converse is also true, so if you offer a discount for early payment when you invoice your customer, you should calculate VAT only on the discounted amount. This needs to be worked in to the tax calculation on orderline, invoiceline and over the entire invoice. i.e. where tax is calculated on the line basis it must be modified for any discounts provided in payment terms.
Price change between when the goods were ordered and when the are invoiced
If there was a price change between the purchase order price and when the invoice is received then this creates an Invoice Price Variance (IPV)
What if the material receipt happens without a purchase order?
In the previous example we assumed that the purchase price came from the purchase order. In some scenarios it is possible that a purchase order has not been raised and we merely want to receipt goods in to stock (ready for an invoice at some point in the future).
This dependency from the purchase order is why a "cost" from the system is used to book the material receipt values rather than the purchase order price.
The variance between the "cost" and the supplier invoice is later recorded as the IPV.
What if the material receipt is not linked to the purchase order?
Comment: The "Inventory Clearing" is currently in the P&L, the first transaction in the process being a DR which means that we are charging our P&L the cost of the goods - even if they are not sold. If balance date were to fall before the matching process we would have a net effect DR 1000 COGS (Inventory Clearing) and CR Liabilities (Not Invoiced Receipts) 1000 in the accounts. I believe that we should make this account somewhere in the Current Liabilities space to correct this.
Matching the Purchase Invoice
DR Not Invoiced Receipts (Current Liability) 1000 CR Inventory Clearing (COGS) 1000
At this point, we have the following balances:
DR Product Asset 1000 (OK) CR Accounts Payable 1000 (OK)
The issue as illustrated above is how does Adempiere accumulate cost (and adjust for it when the invoice price changes from say the PO price)
I think in an IFRS world, it might be difficult to justify costing methods Average PO, Last PO, LIFO (based only on their name) and I'd like to have a closer inspection of Last Invoice, Average Invoice, FIFO, and standard cost.
Paying the purchase invoice
Notes:
- If the business was another VAT registered business in the EU then no VAT should be charged.
Notes
- BIM33132 mentions that IAS2 allows use of the FIFO method and this is not allowed for tax purposes
