Hello, I'm hoping to start an online retail business and have been
studying accounting, however most text books don't delve into real
world situations deeply. I trying to figure out the best way to
handle the situation where the price of inventory goods on my PO
doesn't match the Invoice price we receive from the vendor. I know
this is call a "purchase price variance" but my questions are:
1) Is it required to track this variance? I think it's wise to do so
since I can then determine if this particular vendor is always
charging me more (or less) and if I should continue to use this
2) From the above I would imagine the ppv needs to be tracked by
vendor and not just a generic account or assessing a vendor would be
hard to do correct?
3) I know a PO does not impact the financials since it's only a
"request" for goods and no money has changed hands at this point so
how does this non-impact document relate to the actual invoice which
does effect the financials since it's a payable ?
4) Most accounting text books I'm looking at teat this variance in the
environment of manufacturing and standard costing and not retail so
how to handle this in retail. Also, I'm planning on using the FIFO
perpetual costing method, does this make a difference?
Any guidance on how to handle the PPV and accounts I should be setting
up will be greatly appreciated.
There's no accounting requirement to do so. For your business it's not
necessary if you are handling the books.
The only reason to bother to know is in if they are overcharging you or
billing for prodicts not delivered. Otherwise your PO pricing isn't gospel
to their invoice, as you can easily not have the correct per-item cost in
It doesn't, so tracking it in a small business is not a priority.
Now, you need to know what your cost is, so you can price accordingly,
anything beyond that is wasting time, and time is money.
It doesn't get into the retail environment, at least not at the locally
owned and locally operated business.
Retailers like Wal-Mart probably have that data, and more (the variance
between what their PO said, the amount on the invoice, and the amount they
end up paying), but like I said, for small businesses, you're wasting time,
and lots of it.
What will you do with that data?
If you can answer that, then you'll know if you need to bother. Once you
know if you need to bother, you'll know how to best structure your books and
Ok here is some real world examples.. we are a large company, but the
individual locations we have are not. Location orders product for
resale using a PO. When the product is received at the location they
update the PO for the receipts. Our system tracks each delivery made
to the location for all product. So if a 100 of an item is order but
shipped increments of 25, we would track the 4 deliveries. They can
receive more or less than what is ordered.
When I receive the invoice for posting, I access the PO and match the
items invoiced to the received PO. Our policy is if there is pricing
variance I cannot post if it is more than $5. If there is, I refer it
back to the manager to update the item pricing. We want the price per
item in our system. The POS module will calculate COGS on a per item
basis. Variances if not corrected hit general COGS.
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