Purchase & Sales


I need a quick assistance please.

I have a supplier that is doing some work for me but at the same time i have given him some material to do this job for me. The material i gave him i bought it from a different supplier.

The question is how can i reflect the above in his statement of account. In other words, he has given me an invoice for the total amount of work he has done for me but not deducting the cost of the material i have supplied to him.

How can i go about it ?

Thanks in advance.

create the supplier as a customer and issue a sales invoice for the material given to them.
now make a journal entry for the value offsetting the Accounts Payable and Accounts Receivable account of the supplier and customer account.

Firstly, has the supplier included in their invoice a charge for that material, they may have charged excluding that material.

If they have charged for that material then perhaps you could request a credit note which would reduce the amount owing.

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as mentioned below they seem to have charged including the material.

the supplier cannot issue a credit note unless they receive an invoice for the material.

Yes the supplier can issue a credit note without an invoice.

If the supplier has charged the full amount, then he could issue a credit note for those materials at the values he charged. His charged values for those materials may differ from the material values paid to the third party. If an invoice is sent at the third party material values then the supplier could dispute those as he may have charged less than them.

so what happens to the material lying as stock in the inventory after purchasing from the third party? there is no record of the material movement.

You are assuming an assumption that the material purchased was inventory, the original comment was “The material i gave him i bought it from a different supplier” - so probably material directly related to the job.

However, lets say it was inventory - then you would allocate the credit note to those inventory items. So the inventory arose from the third party and was cancelled out by the credit note from the supplier.

Noting: that a credit note from the supplier is a debit note within Manager

ok i understand. though your explanation makes sense and involves fewer steps i am still in doubt if this is a legally valid process.

assuming the item was an inventory,

  1. how can a supplier issue you a credit note for an item owned by you?
  2. how did the supplier even know you own such an item without you issuing any relevant supporting document to them?
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The supplier would be issuing a credit note to reverse a charge that should not be on the supplier’s sales invoice. You would enter this as a debit note, as @Brucanna noted already.

It is quite common for manufacturers to furnish either specific materials or partially completed products for further work by a supplier. Often, while there may be documentation of what is furnished, there is no accounting transaction to record the transfer. Imagine a bicycle manufacturer. It might manufacture tubing of a proprietary steel formulation, then send tube sections to a nearby machine shop for shaping. It doesn’t sell the tubing to the machine shop; it just sends it for work. It gets the machined tubes back and welds the bicycle frame. It sends the frame to a paint shop for painting. Again, it doesn’t sell or purchase the frame during that process. It just pays the machinist and painter for services on materials it owns.

I think the question that started all this discussion would be like the machine shop charging not only for their machining work, but also for the tubing. Or the painter also charging for the bicycle frame.

the second part of your explanation is correct. as a manufacturer myself this is what we do. but the materials supplied to a party for job work is documented as a delivery note if not as a sales. this reminds me of our discussion few months back in another topic where i had mentioned that while all sales invoices may be followed by a delivery note, not all delivery notes are followed by a sales invoice.

since the material issued to the supplier is documented, the supplier would raise an invoice excluding the cost of material. thus only the service from the supplier is taxable and not the material.

While I vaguely recall the discussion, I don’t remember agreeing that the workflow made sense. How do you keep that delivery note from creating a permanent discrepancy between quantities sold and delivered? Do you then issue a good receipt when you get it back?

The point I was trying to make is that all material provided to a supplier does not necessarily need to be documented in your accounting system. I’ve sent electronic control panels to silk screen printers, spacecraft sensors to optical shops, and so forth without ever making any entry in the company’s accounting records.

But that was the original problem in this topic. Apparently, the supplier did charge for material.

I think… Lubos need to clarify his vision of Manager, so any module not within his roadmap will be categorise as ‘additional’ instead ‘core component of Manager’.

It reminds me he had to revert to old (current framework) from Business-to-Customer framework, In which each manager server per port hosting due to ‘Business Accountant’s ideal of Manager’ - Business-to-Business

Well there is nothing illegal about - recording valid adjustment transactions.

Because they wrongfully charged you for items which they never owned. It was already yours.

I remember this discussion very clearly and at that time - your use of accounting transactions in the form of delivery notes & goods receipts to record movements in inventory which never left your ownership, just relocated for processing before being returned as a different inventory item - was completely slammed.

Or as others have put it more gently “I don’t remember agreeing that the workflow made sense”

Here is a quote from that discussion “To use Deliver Notes implies that the service provider is a Customer and to use Goods Receipts implies that the service provider is a Supplier. Yet your service provider is neither a Customer nor a Supplier as you aren’t selling or buying any Inventory Items with them. Therefore your inappropriate usage of those documents (delivery notes & goods receipts) are not only creating invalid artificial accounting entries which breach all accounting standards but by your own admissions are causing polluted Qty to deliver and Qty to receive quantities for those Inventory Items.”

If your business had internal processing departments - fabrication, paint shop - would you be using accounting transaction delivery notes / goods receipts to record the inventory movement between those departments, I would suggest not, so how come when those identical “departments” are external of the business does the accounting transaction delivery notes / goods receipt suddenly become justifiable.

Internal or external inventory movement requires an “IDENTICAL” management recording system, and as noted by the Manager developer in that same discussion that the Production Order was more appropriate, albeit with enhancements.

@acecombat2 - your post in this topic is totally unrelated.

Yes it does not, @Brucanna, I want to expressed there is vague concept of how Manager gonna transform. That is all.

On the side note, why not place it non accounting document as ERP module? Which the calculation should not affect the accounting core module that hardcoded to generate Financial Reports. Like a ‘float’?

What I’m understand the aforementioned subject doesn’t seem yet to conclude. Is about legality, process and procedures of business ethics or practices?

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i am not aware of the legal requirements in your country. but in India all materials that leave the principal place of business should be accompanied by a document.
you can read the rules and an example at below link.

Yes, a document called a Challan, but nowhere does it say or imply that that document also needs to an accounting transaction, it just needs to be a document which accounts (accompanies) for the inventory movement and records the required particulars of the Challan which the standard Manager Delivery Note doesn’t satisfy.

If you have raw material inventory which goes to a fabrication job worker (becoming fabricated inventory) and then goes to a paint shop job worker (becoming painted fabricated inventory) before being returned, how does your Delivery Note to the fabricator become a Delivery Note to the paint shop before coming a Goods Receipt on the return, all the while the raw material is no longer raw material.

The way to resolve this from both an inventory movement record (Challan) and a change in inventory item type (accounting) would be the following. Establish the Challan as a separate document process:

  1. Created by the production office, if the financial details are unknown by production office then it’s sent to the accounts office for the completion.
  2. Top copy goes to the dispatch office for delivery with the inventory.
  3. Bottom copy gets processed (production office / accounts office) within Manager as a raw material inventory transfer between the warehouse and the fabricator locations. (The fabricator and the paint shop are setup as Inventory Locations)
  4. On completion at the fabricator you would create a production order which would convert the raw material inventory into fabricated inventory, at this point you could also add in the fabricator’s charge so that the fabricated inventory is carried as valued added.
  5. You would then do an Inventory Transfer for the fabricated inventory from the fabricator to the paint shop.
  6. On completion at the paint shop you would create a production order which would convert the fabricated inventory into painted fabricated inventory, at this point you could also add in the paint shop’s charge so that the painted fabricated inventory is carried as valued added.
  7. You would then do an Inventory Transfer for the painted fabricated inventory from the paint shop to the warehouse.

This way all inventory movements and accounting system recordings are in alignment.

On the bottom of the Challan document you could have an Office Use panel where there are boxes for each step (transfer to fabricator, fabricator production order, transfer to paint shop etc.) which can be stamped when processed, and perhaps then filed under the next step to occur.

It is unclear if a single Challan can be used for multiple movements - movement one to fabricator, movement two to paint shop etc.

i appreciate you explaining things in this detail. but unfortunately this would be the only job a business would have time to do on a working day when hundreds of inventory items are to be processed by a few many labor contractors.

maybe Manager program should evolve to meet the needs of manufacturing business. i guess a new tab for Job Works should be introduced where a raw material movement can be recorded which is independent of the already existing Delivery Notes. this way items can be sent for processing and later received as a new inventory through the Goods Receipt tab. the labor bill for the same can be entered as a Purchase Invoice which links to the materials received via Goods Receipt.

a single challan or delivery note can be used for recording movement to a single party and not multiple parties. further processing of the same material at a different party will involve receiving the materials back to the primary business and then delivered to a third party via another challan or delivery note. the labor invoices are then received separately from both parties.

A business doesn’t have to do all of the accounting steps, it can be truncate to just one

  1. On completion of all the processes you would create a production order which would convert the raw material inventory into the painted fabricated inventory, at this point you could also add in all the different job worker charges so that the painted fabricated inventory is carried as valued added.

I concur about the Job Works but both the raw material movement out and the new inventory movement back would have to occur via the Job Works so the conversion (production order) can occur. This way it would be totally independent of both the Delivery Note and the Goods Receipt. The labour bill can be linked within the Job Works.

I don’t think this is right. In your reference article it states under Form ITC - 04:

“He must include the details of challans in respect of the following-
•Goods dispatched to a job worker or
•Received from a job worker or
Sent from one job worker to another

You may have to issue a new / separate Challan but the material can go direct.

this is not entirely necessary. just the outward movement will be sufficient.
i will explain a bit on this.

  1. Pig-Iron (an inventory item) is purchased from a supplier.
  2. Received the same via Goods Receipt and the Purchase Invoice is entered.
  3. A Job Work challan is entered to record the movement of Pig-Iron to a labor contractor.
  4. The labor contractor processes the Pig-Iron and converts it to another inventory item, say Castings.
  5. The labor contractor makes an invoice for the labor and any materials used for the conversion of Pig-Iron to Castings.
  6. This is then entered as a Purchase Invoice and received via Goods Receipt as a new inventory item, Castings.
  7. A Production Order for the final product manufactured at the primary business place will involve only the Castings as a BOM and not the Pig-Iron.

Now as per the above workflow,

  1. the Job Order itself should work as a production order where the user defines what inventory will be received back irrespective of the quantity.
  2. when the Goods Receipt is entered, there should be a provision to select the appropriate Job Order just like we already have the ability to select the associated Purchase Invoice.

the above method will balance the inventory quantity and record all movement in an efficient manner in a simple workflow.

this is more or less to reduce the transportation time. the physical movement of materials is possible from any place. but the documents are supposed to be generated by the owner of such materials. the labor contractor never owns any materials.

This Purchase Invoice would only be for “the labor and any materials used for the conversion” This purchase invoice wouldn’t have any inventory quantities listed so therefore it can’t have a Goods Receipt.

Or in another words, to have a Goods Receipt with quantities you also need to have a Purchase Invoice with quantities. That is how the Manager workflow for inventory works.

Therefore, replace your Goods Receipt with a Job Work “Received” and you have exactly the same workflow as above. Also, having a Job Work Received would allow the Job Work Delivered (the challan) to be matched off, enabling the user to see which Job Work Delivered are still outstanding.

The Job Work Delivered would represent production order “opened” and the Job Work Received would represent production order “closed”, plus, the job worker charges could be added to the returning inventory item as with the normal production order.

Furthermore, having a Job Work Delivered / Received would enable users who don’t have the Goods Receipt tab activated to use the Job Work