@Claude. I’ll make one last pitch using your example:
Hi Alisdair, Yes Thank you for the response…!
No It is not that we have a “ruling” as such in South Africa, it is
just what seems to be making Logical Flow in the Operation.
By this I mean, I will Purchase Stock from my
Supplier, lets say 10 x Items @ R100 / Item.
This I believe should now be recorded as Purchase of Stock as an Expense of
No, at this point the purchase is recorded as an asset - Inventory is considered an asset.
Dr Inventory R1000 (10xR100) [ASSET] /
Cr Accounts payable to Supplier(10xR100) [LIABILITY]
Again, nothing goes to expense here you bought an asset (something you
can sell) you did not incur an expense at this time.
I now sell this Product at R150 / Item. The next day
I sell 2 x Items. Now I believe these Sales of Inventory Items should be
recorded as Income @ R150 x 2 = R300 Gross Profit is R300 for these 2 x Sales
and Net Profit will now be R100.
This is the point at which you dispose of, i.e. sell your asset and make
some profit. The sale triggers two accounting entries:
Dr Accounts Receivable from customer R300 (2xR150) [ASSET] /
Cr Sale of Inventory Items (Revenue) R300 (2xR150) [REVENUE]
The disposal of the asset:
Dr Purchase of Inventory items (Cost of Goods Sold) R200 (2xR100) [EXPENSE]/
Cr Inventory R200 (2xR100) [REDUCE THE ASSET]
After the above your balance sheet and income statement would be:
- Receivables 300 - Accounts Payable 1,000
- Inventory 800 - Retained Earnings 100
Profit and Loss/Income Statement:
- Sale of Inventory Items 300
- Less: Cost of Goods Sold ("Purchase of Inventory") 200
- Net Profit 100
(the profit rolls into retained earnings on the balance sheet)
Proper accounting requires matching the timing of the revenue and cost of goods sold for the inventory sold so that your income statement reflects the net profit (revenue less cost of goods sold) at the time of the sale. The key point here again is that inventory is considered an asset so when you buy it you have bought an asset not incurred an expense.
Had the accounting flowed in the manner you suggest you would have incurred on day one and expense of R1000 (10@R100) and on day 2 income of R300 (2@R300), i.e. a net loss of R700 at that point. That is not the case as you stated above your profit is R100. It is by recording inventory as an ASSET not expense and then creating the revenue and cost of goods sold (expense) entries together at the time of sale for the quantity sold that you end up reflecting the correct profit R100 on day 2.
I can’t really add anything further to this topic other than to say that I am using manager for inventory and so far it’s been doing exactly as I described above and that is exactly what I expect based upon standard inventory accounting practices.