Buying and selling of physical products is my business. I have this neighbour that sells the same things that I sell. Sometimes we borrow inventories from each other and return them later. For example, I can borrow inventory ABC from him if I run short of stock to return them later when my inventory arrives. He also borrows from me and returns them later.
Please what is the best way to capture this type of transactions in terms of accounting entries?
Thanks.
Where I have done this in the past I entered an inventory purchase with a zero dollar value when I “borrowed” the item and then entered an inventory sale of zero dollar value when I “returned” the item.
Would this not undervalue your inventory as Manager uses the average method. The idea of inventory is that you sell from it, and thus the cost price should be known to ensure that the inventory value is correct and the cost of sales correct as well.
In reality you give each other credit, so I would for example make my neighbour both a customer and a supplier and use purchase and sales invoices to change the inventory. So if you have ran out of an item your neighbour turns into being your supplier and when you need to return the supply given to you after purchasing it from the “real” supplier your neigbour will be the customer. In both cases you would need to use the cost price as the sales price in the sales and purchase invoices to your neighbour.
Better is to prevent this happening at all.
Whoops, I think you are right. Better rethink my process!
In my example you need to put the sales and purchase invoices to date far into the future as you are not expecting to actually have any financial transaction related to it (ie no payments nor receipts from the neighbour). The invoices just help you to keep the value of the inventory correct and as a bonus helps you keep record of what inventory items you owe and returned to your neighbour.
A barter exchange is a financial transaction which has legal and tax implications.
I agree invoices simplify the documentation however they should be dated consistent with the date the transaction occurred.
The balancing transaction can then be completed via a zero valued transaction (payment or receipt particularly if there is also a cash adjustment component) or journal entry
The alternative is to do it all as a zero valued “Cash” sale/purchase via the payment or receipt tab but specify “Other” not “Supplier” or “Customer”. Negative quantities are also required for one arm of the transaction if this approach is used.
Sorry but this does not qualify as a barter exchange. It is essence a short term loan of inventory items that need returning.
As for invoice dates, yes the issue date needs to be on the dates when inventory items change
In the example I gave you there is no need for a balancing transaction as there has been no payment or receipt issued.
The alternative you quote is messy and will mess up the value of the inventory. The trick is not to engage in actual financial transactions against the invoices at all.
On re reading that is a reasonable interpretation. However the returned items are not actually the same physical items as the ones which were “borrowed” thought.
But ignoring the fact the actual items are never returned but just paid in kind then use:-
Invoice with subsequent credit note when your neighbour / customer returns the items is more appropriate, as per https://www.manager.io/guides/7425
I can not agree with that, the items have a financial value and ownership has been transferred.
I do had the same problem for which I created three accounts, one as a customer another as a supplier and a cash account in the same name.
Whenever I borrow an Item I create a purchase invoice and immediately create a payment from that cash account.
And when I return that Item I create a Sales invoice and immediately receive a payment to that cash account
since there is no arrangement of sales or purchase, the inventory is still considered as an asset to the original party. only the inventory location is changed.
in this case, create your neighbour as an inventory location and just transfer inventories to and from there. below guides would help.
https://www.manager.io/guides/10677 and https://www.manager.io/guides/10707
That is indeed another example how to keep the value of the inventory from which you sell accurate so that the balance sheet and the profit and loss account are closest to reality.
The example of @AMM is similar to mine but adds a financial transaction to clear the invoices which would probably be agreeable to @Patch concern, be it that the invoices themselves indicate entry or exit of items from inventory (accrual accounting) and you therefore do not need to add a financial transaction that never takes place.
You can search the forum where some issues similar to this are resolved by un-ending invoice as it will only affect the Balance Sheet and not the Profit and Loss account thus not needed for tax-reporting.
I am very grateful to everyone for the suggestions. They are wonderful. I took that of @Patch as it captures what I need much more though not exactly the way I would have wanted but I can manage it for now.