Inventory & cost of goods sold

Hi, I’m new to managing my accounts with a computer based program so please bare with me as I’m learning as I go. I apologies in advance as well :blush: . I chose Manager as it looks to be a great program with lots of features, but still easy enough for me to understand. I would like to use the cloud version, but want to make sure it’s a suitable program for our business, and one that I can operate easily to do our main business tasks. I originally used a cashbook as our business was quite small, but in the last few months it has grown and it’s getting harder to keep all the paperwork under control. I’m no expert with accounting but I’m always reading accounting pages to learn so I think I know the basics.

So far I’ve read all the guides as well as looked through the forum for anything I wasn’t sure on. This helped me with the majority of what I needed to do which was fantastic. I managed to set up my chart of accounts and put all our business information in manually, however I’ve become stuck on a few things, and after spending the last fortnight reading everything I could find on the forum, as well as accounting websites, I haven’t progressed any further now. I actually think I’ve just completely confused myself, and I’m probably complicating things more then I need to as we are not a large company and what we do is fairly simple accounting wise. I think it’s just time to bite the bullet and ask for help as I can’t figure this out.

I have two main issues which are the “Cost of Goods Sold” in chart of accounts, the other issue I’m having is with the Inventory & Manufacturing side of things. I guess these two are really under the one issue. I’m not sure exactly use/ add these functions for our business so the figures all work out properly. I’ll try to explain our business which hopefully will help make sense of my issues. Sorry in advance for the long read, I couldn’t explain it any other way.

We are a timber business that also makes custom furniture on a very small scale. We are Australian based, registered as a sole trader, not GST registered, and our business is only ran by myself & my partner (basically a work from home business) so no employees. All our outlays are paid on the day with cash/card, and all our income is either cash/ bank deposit. Our business was origionally a hobby so it was kept fairly simple. However in the last few months our small business has had a lot more work then usual, which has ment more customers, more timber cut etc. So it’s getting harder to keep track of everything with a pen and paper.

With regards to stock/purchases, the majority of our timber we have is in log form from. We source these logs from tree cutters or property owners that don’t want the logs or to have the added expense of taking it to the tip, We generally don’t pay for the logs unless it’s a very large log worth the expense. But paying for logs may only happen a few times a year, the rest are free. So our only real outlay the majority of the time is the expense for us to run our crane truck to collect the logs & take them back to our property. We then cut the logs into slab form using our portable mill. Again no real cost other then the running cost of the portable mill with petrol, chains and replacement parts.

We then sell the timber we have cut in a few different forms to customers. We sell rough sawn slabs (green & seasoned), slabs that we work on (dress, sand, paint etc) as well as we custom make furniture which we sell either to order or from our display room. Our only real outlays for furniture or slabs that we have worked on as far as materials go are things like paint, screws, sandpaper, glues and the running costs of the machines, tools, electricity etc.

To the best of my knowledge & from what I’ve read, most of these items would come under consumable materials and really shouldn’t be listed as inventory, as we don’t sell the products, or store a large amount of them. To date this is what I’ve always written them down as on our paper system as there is no real way to track the exact use of these items to each job. Of course from time to time there are items like hinges, handles etc which are job specific, but that side of things I know I can bill directly to the job. So basically our stock on hand would be the above consumables, which I’m not sure should even be classed as stock as such. And our inventory is basically the timber we cut, any small amounts we do buy and the furniture we make that stays in the display room for sale. For these items I created a account under expense called “cost of goods sold direct consumables” and all the paint, sandpaper, screws, bolts and other indirect materials like paint cups, paint brushes, dust masks etc I’ve placed in this account.

For all the Logs, Slabs Cut, Finished Slabs & Custom Furniture created for the display room and for customers, I put all these items in the inventory tab. I started with just the Logs (obviously with no amounts attached to them as they don’t cost anything), and then use the manufacturing tab to turn the logs into slabs raw, then manufacture again to turn those into finished slabs, or furniture etc. The main issue with this, although it’s good for keeping track of the logs/ timber or furniture I have on hand or made for a customer, it does nothing as far as working out the cost of goods sold, as there is very little cost assosiated with this process. And the main costs are all in the expense account. I did contimplate listing all the items in consumables into the inventory, however our items come from different stores, different brands and different prices. So it would take me forever to list them all, let alone try and work out how much of what product/brand etc went into each item manufactured. So this really isn’t a option. So I figured if I use inventory to basically keep me informed as to how much timber/ logs etc I have on hand. And when I have sales, the cost of what’s in inventory goes into the automatic expense account that’s linked with inventory “Cost Of Inventory Sold” , then somehow get my chart of accounts to link the inventory sold expense account, with the cost of goods consumables account I made my profit and loss statement would be correct. It would also somewhat give me the necissary accounts RAW MATERIALS, WIP & FINISHED GOODS accounts manufacturers are supposed to have, it just wouldn’t list all the times in consumables. I’m assuming the Inventory account is the raw materials, WIP is the manufacturing tab & finished goods is just that. I just wasn’t sure if my inventory account had the raw materials listed, as well as the finished goods that it would mess the accounting side of things up as it’s all under inventory.

My other issue is again with cost of goods sold. How do I make a section Cost of goods sold & value of stock on hand show up on my profit or loss statement or balance sheet for my year end accounting? as manager dosn’t currently have this. I need this for my financial reporting here in Australia. I read a heap of posts on the forum for cost of goods sold, I seen others had the same issue, but I didn’t understand how they worked around it, or made it work. I’d also need my cost of goods sold to calculate the inventory plus the consumables account as well as I guess other overheads according to accounting for manufacturing “I think”.

Sorry for the very long read, I hope I’m not too far off understanding this :frowning: . If we just purchased everything like most people Id would be a lot easier for me to make this work as I understand the principle of it all. Just not sure how to apply it for my situation.

Thank you :slight_smile:

I’m no expert on either inventory or manufacturing with Manager, since I didn’t do the accounting when previously involved with businesses that might have used such functions. I use Manager only for a service business. But I have a few thoughts you might find useful. (Hey, the advice may only be worth what you pay for it. :wink:)

First, you can’t be a sole trader and have a partner. If all the financial responsibility and funding is associated with a single person, then you either have an employee or a subcontractor. Local laws will probably determine that. If you truly share investment in the business and profits, then you need to set up capital accounts as partners and change your legal registration.

Second, I would consider seriously whether your concern over inventory and cost of goods is too much. You might be able to handle most of the items you described as consumables, especially the ones you get for free, which you might decide not to account for at all. One question you have to resolve is what you really want to get out of your accounting system. Obviously, you must be able to compute profit and loss, but for small businesses that can be at a very high level. If you are wanting to know exactly the profit you’ve made on one, individual manufactured piece of furniture, then you need more complexity. But ask yourself whether it would be worth it.

Volume comes into play, too. If you can see all your furniture in the shop or display room, a computerized inventory might not be worth much. Growth plans could also be a factor. Since this started as a hobby, how far do you intend to take it? Do you envision a large warehouse in the future? Distribution of furniture through other dealers? All those things could change your approach.

Another thing to consider as you design your chart of accounts is tax compliance, which may drive you to more detail than you would otherwise need, but not frequently in my experience.

I, too, make a few wooden items for sale. That’s not my main business and also evolved from a hobby. But it is convenient to account for the occasional sale through my existing business without the hassle of setting up another company. Most things are constructed from salvaged timber, either offcuts from a local manufacturer that I pick out of their waste stream (with permission), weathered shipping pallets, or recycled demolition material. Most is used quickly, hanging around for less time than a bottle of glue (which is certainly a consumable supply). Some, though, sits in the storage shed until I find the right use. But an inventory would be useless, even if I was able to catalog exact species and dimensions. I’m just not trying to sustain a manufacturing flow. I get ideas from customers or from how one piece of salvaged timber goes with another. So while my revenues and expenses are all properly accounted for, I just don’t worry about anything in between. When I need the odd piece of lumber for a specific purpose, it goes down as a consumable supply and is used immediately. Very little accounting involved, so I get to focus on what I enjoy.

Thanks Tut for taking the time to read my post and to offer you help. It’s much appreciated. I definitely don’t want anything more complicated then I need so simple is good. Only reason for my concern over inventory & the manufacturing process was due to all my reading/research which I knew afterwards had only caused me more confusion, and probably complicated things more then I needed. It was only after reading that I thought I had no choice but to show inventory as well as a manufacturing process, even though we manufactured very little and everything was custom made & different to the last item.

The partnership side of things with our business is fine, my apologies I really should of worded that sentence better. Were partners in the sense of husband/wife not business partners. Although some days I should pay myself I reckon :).

Basically I really just want manager to organize my accounts so that everything is where it needs to be to make my financial reporting at the end of the year easier. I also like the features of being able to send a quote/ invoice or receipt electronically to our customers, rather than the old paper pen method. Prior to starting manager we just used a basic cash book, and done all receipts etc in a standard receipt book. But since our business has been slowly getting busier I’m finding it harder to keep on top of the paperwork side.

Our only stock, not including the consumable products would be the timber & our furniture. We do have on hand a reasonable amount of timber, but the majority all has no cost associated with it, so as you said probably no point listing it as inventory. I like to keep a record of it mainly for our own knowledge so we know what we have available for customer inquiries, but I could do this on a spreadsheet rather than trying to make it work in manager. So really all that would leave is the small amount of timber we do purchase, as well as the furniture we make. There would never be more then 15 ready made furniture items at one time, and maybe 20 - 30 various size chopping boards so I can easily watch this.

As far as expanding goes, we have no immediate plans to expand to a warehouse or anything like that. Were quite happy keeping our sales from home, and our timber stored at our property. Although the business has grown, we have no intentions of having employee’s or anything like that at this stage. It just means that we have to work a little harder.

With the cost of goods sold, I really need this so I can comply with our end of year requirements with the ATO as this is something they want to know. Is there any way to set up my chart of accounts so it calculates the cost and adds it to our profit and loss statement?. If not I’ll just have to manually add it up. So would I be best to just remove inventory all together and put everything into expense accounts or maybe just make another asset account that’s for the few items of timber we do buy, hinges etc?.

Thanks again

Hi Alana,
what i did was open an account called Cost of goods sold as an expense. to get a value you need to use the accounting formula to calculate . DR cost of sales exp credit inventory . Inventory balance you can do this providing you didn’t use the sales invoice features in customize

Sorry, but you just stepped outside my comfort zone. I’m not in Australia, and know nothing about ATO’s requirements, so I don’t want to lead you astray. I would spend a little to consult an accountant about how to best handle cost of goods in your situation in a manner that will be as simple as possible but still compliant with tax law.

In my experience, though, the most important thing, no matter where you are, is to be able to demonstrate unambiguously what your expenses are and to record all your revenue correctly. Knowing the bottom line cost of goods sold is second. Almost anything else you might do comes down to being more detailed information about your business. Such information may be useful for making management and pricing decisions, and inventory control capability might simplify stock control and ordering, but all at some cost in complexity, possibly without adding a lot to your actual knowledge of your business.

Thank you Ronald for explaining how to do it.

That’s ok Tut, I completely understand every country has its own requirements when it comes to reporting & that any advice other than an actual accountants can only be taken as general advice. As soon as I can I will get advice from a qualified accountant that can steer me on the correct path for my reporting requirements. In the meantime I just needed some general advice for working out how to organise our manufacturing side things so my accounts and use of inventory on manager wasn’t completely wrong requiring me to completely start again. As well as if there was a way to organise the accounts for cost of goods sold as I do know we must report and show this for our tax. But as far as the other information that really is only to keep me informed with how the business is performing, at this stage it’s not a concern. Thanks again