Manage inventory - Part 3 Conclusion

Part 1 of this Guide on how to manage inventory covers purchasing, producing, and selling inventory items in Manager. It also covers backorders and content of inventory reports when only basic functions are enabled. If you have not yet read Part 1, you should read it first.

Part 2 covers more advanced features, including credit and debit notes, inventory kits, delivery notes, and goods receipts. It describes how the program’s behavior changes when these additional functions are used. If you have not read Part 2, you should read it after Part 1.

This Part 3 describes additional capabilities: inventory locations, transfers, and write-offs. You will need to understand information in Parts 1 and 2 before you can use the capabilities discussed here. To begin, here is the complete status of inventory after all transactions described in the ongoing story of Parts 1 and 2:

Inventory locations

Inventory locations are separate places where physical inventory is held, such as warehouses, retail shops, and workrooms. They are defined under Settings. By default, all inventory is held at a location named Unspecified location until transferred elsewhere.

Brilliant Industries decides to open a second warehouse for inventory storage and shipment. It names the original warehouse North warehouse and the new one South warehouse:

If inventory locations have been defined, a field appears on cash receipt and payment forms whenever an inventory item is added to select which Inventory location the items will be delivered from or received into:

A cash sale or purchase is presumed to involve immediate delivery or receipt of goods from or to a location that can be specified at the time of the transaction.

The same field will appear on sales and purchase invoices unless the Delivery Notes and Goods Receipts tabs are enabled. Then, location must be selected on the corresponding delivery note or goods receipt. This is because a credit sale or purchase may involve delivering or receiving goods from or to different locations at different times.

Brilliant Industries must now make a location selection on every cash receipt or payment and every delivery note or goods receipt:

Inventory transfers

To move inventory between locations, enable the Inventory Transfers tab. Transfers can shift one or more inventory items in any quantities between locations, regardless of whether the stock is owned by the business or already committed in a sales transaction. Manager will correctly track which stock is owned, to be delivered, etc.

Brilliant Industries uses an inventory transfer to move about half its inventory from the Unspecified location to North warehouse. In our example, this transaction only assigns inventory to the new location name, since the physical location has not changed:

Brilliant transfers the remaining inventory to South warehouse with a similar inventory transfer. A new report, Inventory Quantity by Location, became available when the new locations were created. That report now shows where all Brilliant’s stock is stored:

Inventory write-offs

Inventory is sometimes lost, stolen, damaged, or spoiled and no longer available for sale. Or, it may be consumed for internal company purposes, given away for marketing reasons, and so forth. In these situations, the value of inventory must be transferred to an appropriate expense account. Inventory write-offs accomplish such transfers and correct quantity counts. To write off inventory, first enable the Inventory Write-offs tab.

Brilliant Industries uses several 60 W light bulbs from its inventory when moving into the new south warehouse. So it writes them off to a Repairs and maintenance expense account:

The procedure would have been identical if those light bulbs had been broken during the move, but a different expense account might have been chosen. The Inventory Quantity Summary report reflects the adjustment:

The Inventory Value Summary report likewise shows an adjustment to value and average cost. And the Inventory Quantity by Location report shows a reduction in quantity on hand at the south warehouse.

Inventory effects on financial statements

Inventory transactions affect both the Balance Sheet and Profit and Loss Statement. Many transactions are posted by default to accounts created automatically by Manager as relevant tabs are enabled. The principal accounts involved are used as follows:

  • Inventory on hand, an asset account, reports the value of all inventory items owned but not yet sold. Recorded inventory value can generate future income.
  • Inventory – sales, an income account, records revenue earned from sales of inventory items.
  • Inventory – cost, an expense account, records the cost (at average cost) of inventory items sold.

Additionally, expense accounts are typically created to collect non-inventory costs of production orders, write-off expenses for advertising, breakage and loss, and internal consumption.

You can assign inventory items to custom control accounts. You can also designate accounts of your choosing for posting of inventory sales and cost of sales on an item-by-item basis. See another Guide for instructions.

Brilliant Industries’ Balance Sheet and Profit and Loss Statement for the year encompassing all example transactions in the three parts of this Guide are shown below. (The business began the year with 10,000 in the bank. Zero balances are suppressed. Accrual basis accounting is selected.) For purposes of illustration, no other transactions are included:

If cash basis accounting is employed, inventory transactions on open sales and purchase invoices are ignored. This can result in large differences between the main financial statements and inventory reports, making it very difficult to reconcile and verify accounting records. A more complete and accurate representation of business position and performance is provided by accrual basis accounting. For this reason, most accountants strongly prefer accrual basis accounting. And in some tax jurisdictions, companies selling inventory are legally required to use it.

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