It was interesting, as I read this entire thread, to notice that you identified the cause of your problem on your own—in the very first post. You stated it best in the quote above from post #9. Let me say it another way: you have inventory that only comes in and consumable items (lumped together) that only go out. Both factors are problems, and neither offsets the other. If they were offsetting, they would still be wrong, but would make it even harder to notice.
When your business uses consumable shop supplies, you must make a fundamental choice. Will you:
- Purchase, monitor, and track the consumables as inventory items, through a series of accounting transactions, OR
- Handle them as current expenses.
In each phase of purchase or consumption, you can only do one or the other. Right now, you are trying to do some of both. (At the end of this post, I will touch on a hybrid method.) The choice between those options will be influenced by several considerations, including:
- Value of the consumables
- Rate of consumption of the consumables, notably whether they are typically consumed within a single accounting period
- Ease or difficulty of tracking measurable units of consumption (such as number of screws used, amount of thinner consumed on a job, expiration of glue once a container is opened or components are mixed, and so forth)
- Local rules on capitalization (as mentioned by @AJD)
As you consider your choice, remember some accounting principles, as well as characteristics and features of Manager:
- Something cannot be both a fixed asset and a consumable supply. It’s own characteristics and the nature of your use will determine which it is. You should have a firm policy on this (preferably written) consistent with local law and accounting standards.
- Non-inventory items in Manager are simply shortcuts for data entry. They standardize data and make it easy to remember account posting decisions. But they do not help track quantities, average costs, or profitability in any way. Whether you use them or not, they do not enter into the decision on how to treat consumable supplies. But they can be convenient as a way of charging customers for their use. Just understand that you could do exactly the same things with manual line item entries, but not as quickly.
Now, let’s return to the numbered options above on how to treat consumables. If you choose Option 1, you obviously can monitor incoming consumables through purchase invoices and/or payments. The value and quantity on hand will go up when you buy them. To record their use, you can sell them as individual items through sales invoices and/or receipts. But you would need to record at least an estimate of the amount used on relevant sales transactions. That is difficult to remember and will lead to stock take errors that must eventually be corrected with either inventory write-offs or journal entry write-ons.
You can also record consumption of consumable inventory items through production orders. But that presumes they are consumed to produce other finished inventory items. This would not be feasible if, for example, you simply used them to build a custom product that did not pass through your inventory, but was delivered directly to the customer. It will probably also lead to the need for write-offs or write-ons.
If you choose Option 2, simply buy the consumables, posting their cost to an appropriate expense account. Non-inventory items can be set up to make this quicker, but their use would be entirely discretionary. Once you have purchased them, you never have to track or count them again.
Since non-inventory items are not tracked, they can also be used as a way to charge customers for their costs (with or without additional markup). Simply add the non-inventory item to a sales invoice or cash receipt. Auto mechanics frequently do this by adding a “shop charge” or “hazardous material disposal fee” to your invoice, in addition to specific parts actually used for a repair. They make no attempt to assess the true cost of using the shop or disposing of hazardous waste on your specific repair. Instead, they estimate average costs over some period of time and simply tack on the extra. From an accounting standpoint, such add-ons are posted to an income account selected for the purpose.
As for the hybrid method I mentioned above, it is possible to purchase and track consumables as inventory items but periodically write some off to a consumable supply expense account. Under this approach, you might buy and stock large cases of screws, drums of thinner, and pallets of glue. When necessary (typically as you open a large but identifiable container), you create an inventory write-off, transferring the cost of the consumable to a consumable supply expense account. From that point, you can handle the consumable as though it was originally purchased as a consumable, rather than an inventory item. You can charge customers for it as a non-inventory item. Or you can just factor the cost of consumables into your pricing decisions for whatever you sell to the customer.