We have an external “investor” who stocks products in our business. We sell these products and take a share of the profit, with the rest going back to the investor. At all times the products are owned by the external investor, but we process the sale through our accounts. I’m just wondering how to account for this in Manager? As we haven’t paid for the item initially it’s not part of our inventory. However, we make profit off selling the products, and I imagine that we need to account for the movement of the sale money through our account.
There are various methods for processing this, so it really depends on the actual arrangements. Do you take a commission on the sale value only of does the cost of the product have a bearing on your profit share.The first thing to remember is that you are selling on consignment, so all proceeds belong to the owner, who then pays you a “fee” for your services.
When you sell these products the Invoice total should be posted to a BS Liability trust account, as you are holding the monies in trust on behalf of the owner. You would’t post them to your own income accounts.
If you are selling for a fixed fee, say 10%, then you would deduct this from the payment to the owner.
Say you sold 1000 for the month, you would spend money for 900 with 1000 posted to the trust account and -100 (note the minus) to your Income Commission account.
If the arrangement is more involved, then you may require a calculation sheet completed before payment
Thanks for your reply. In answer to your question, the cost of the product has a bearing on the profit share. Each product is priced differently depending on where it is sourced from (paid for by the investor). Our business pays for reconditioning, marketing, staff hours etc (i.e. we cover the cost of sale). After the sale we (the investor and our business) are each reimbursed our respective costs, and then the pure profit is split 50/50 between us and the external investor. Do you think your original recommendation applies in this instance?
I really appreciate any advice you can give me as I’m a bit stuck with this one.
One option is to run that operation via a separate partnership, but lets explore that latter.
Also, without knowing what the product is (small & voluminous “laptops” v’s large & singular “automobile”) can impact on the solution.
The investor’s costs seem to be clearly identifiable (the purchase), but are your costs as clearly identifiable.
If your costs are clearly identifiable, (say per product), then as your costs are incurred you would post them to a Work-in-Progress account in the Asset section of the BS. If you have multiple products on the go you would have a Work-in-Progress account for each product.
Once the product is sold, the proceeds would be posted to a Investor Trust account in the Liability section of the BS, no need to keep separate Trust accounts (per product) as its only acting as a clearing account.
Then you would do the following accounting transactions:
- A Journal transferring the WIP to Expenses and transferring an equal amount from the Trust to Income.*
- Reimburse the Investor the purchase cost from the Trust
- Share the Balance of the proceeds 50/50 via payment to the Investor and Journal to your Income*
- It’s suggested that the Income from the reimbursement and profit be recorded in separate accounts.
If your costs aren’t so clearly identifiable per product then the creation/operation of a partnership could be more effective in managing variable costs such as marketing and staffing. .
PS: Currently you can’t archive inactive BS accounts, so you would “recycle” WIP accounts once a product has been sold.