Hi, I have just started with your program this evening, and in the main I like it well enough. My problem is that I have added an expense account called “Purchase of Inventory Items” from your list and it appears in the “summary”.
However, when I enter a purchase order for Inventory items, In the “Account” box, this expense category does not show. As a result when I create the PO, and then check the summary, the cost of that PO does not appear as an expense in the “Expenses” category fields. The amount seems to have disappeared altogether even though I ended up coding it as an ASSET under “Inventory to Hand” which is wrong in my mind.
What am I missing?
You can’t directly post to Purchases of inventory items account. When you purchase inventory items, they are not an expense, they are asset so you post the purchase to Inventory on hand account. This is how inventory accounting works. The purchase becomes expense only after the item is sold. It is asset while unsold.
When you sell inventory items, you categorize sale of inventory items to Sales of inventory items account. Manager will automatically reduce inventory on hand and increase your purchase of inventory items expense account based on weighted average costing method.
Thanks. I get that.
Another Q though - why “weighted average costing” method instead of the recorded cost price of that Inventory Item? - entered when I establish the item in Inventory?
First-in-first-out method is a bit trickier. You might purchase the same inventory item twice for different prices on the same day. How does the software determine which one you’ve purchased first? Or you decide to write-off some value from your inventory on hand items. How does software determine how much exactly to write-off from individual items if they were purchased at different prices? This is what makes costing in FIFO not as easy as it might sound.
This is not just my conclusion, enterprise-level accounting systems like Great Plains have learned from their mistakes too and are also switching from FIFO to weighted-average. It’s more accurate and more predictable.
Thanks again. Checked out what it was actually doing on some invoices I wrote, and its fine. My inventory prices are pretty fixed, so the average will of course be the actual until they hit me with an increase. I’m getting the hang of this now, having used MYOB for years. The methodology is a bit different, and I must say that posting invoices and purchases etc is a lot more involved, but once I’m used to it, this will do me very well indeed. Thank you so much for making it so freely available and giving such excellent support. All kudos to you.