I purchase certain products in bulk, say 50 cubic yards at a time and then sell the product to customers by the yard. What I buy in and what I sell rarely matches up. When I have sold all 50 yards of that product I have usually sold it as 55 or 60 yards. This leaves a negative inventory balance in QB. I assume that I can just make an inventory adjustment to 0 but I'm not sure what account I should charge this to. Should it simply be shown in an income account - i.e. Income: Bulk Material ??
It seems to me we've just had exactly this query in the thread "Question about "Customer/Vendor Inventory Items". Tara's answer there was.
No, don't try to guesstimate buckets. Setup one Non-Inventory Item with the checkbox checked. On the left side of the bottom of the screen enter a cost per truckload of $100 or whatever the bulk load costs you (if its standard, otherwise leave it zero) and assign the cost account to Cost of Goods Sold. On the right side assign the cost per bucket, whether you charge tax, and assign an income account.
It'll look like you're taking a huge loss just going by those numbers if buying it costs $100 and selling it brings in $10 per bucket. However, we know that's not the case because you'll sell many buckets from just one purchase. That's why you use a Non-inventory item. It will allow you to enter a bill, or write a check, for 1 Mulch at $100. It'll allow you to enter an invoice or sales receipt selling 20 Mulch (buckets) at $10ea.
In other words you can buy one but sell many using this item type. It won't track in inventory because its not an inventory item but since you don't get an exact number of buckets per truckload each time you realistically cannot tell QB how many you have on hand.
True but her believe "try not to guesstimate" is not shared by all. There are many businesses where and educated estimate as to initial quantity with periodic corrections is preferable.
My limited experience is showing - I'd regard 10-20% uncertainty as too great for this approach, but I always require accounts to reconcile 100%, so ...
Despite some belief to the contrary, there are many accounting transactions that involve estimates and opinions, and therefore that do not "reconcile 100%". A common example is depreciation. Of course some people believe the opposite, that almost all accounting is a matter of arbitrary choices and opinions. As in many other fields of human endeavour, probably the truth is somewhere between the extremes.
Many of the opinions expressed and much of the advice given here come from non-professionals, and certainly the experience and other credentials of the opinionated vary widely. Many of the questions asked do not provide sufficient information for a well-founded answer from anyone, professional or otherwise - but still the opinions and advice flow.
When > >> It seems to me we've just had exactly this query in the thread
In the case of mulch or even fill dirt you'd have to manually unload the purchased bulk by the measure of qty you use for resale or in the course of your work in order to obtain an exact number & have a 100% reconciliation in any given timeframe. Purchased truckload 1 may be the equivalent of 50.75 buckets, truckload 2 may be 49.50 buckets, truckload three may be 52.10 buckets. When you buy such loose, mass, items like the ones I named in one quantity but resell in a different quantity then you're setting yourself up for inventory discrepancies unless you initially count out the bulk by the measure of qty you resell.
Every accountant I know & work with is perfectly fine with a periodic adjustment for small to medium sized businesses who are not having any IRS troubles and/or whose records aren't scrutinized by the public or other agencies. If you know you sold 250 buckets of product this quarter, have what looks like 5 buckets left and you purchased 5 truckloads at $100ea then simple division implies that you averaged 51 buckets per purchase for an average cost of $1.96 per bucket.
Its not a perfect method but then the above isn't a perfect product when it comes to qty on hand. I wouldn't expect the same method to be proper for most businesses who buy & sell items that have an actual qty count that can be measured per item.
All accounting involves estimates. Consider a reserve account for bad debt. You have to estimate how much bad debt you will have for the credit sales you do. It will never match! If it did a serious examination of the books would be in order because I would suspect they were cooked. You guess how much debt will go bad from your historical record. It is called an estimate.
Bulk materials like the OP and the OP in the other thread asked about are subject to shrinkage. The amount sitting in the back forty is subject to gain or loss depending on the humidity and temperature. Some of it is lost going home on boots. The material at the bottom of the pile may be compacted more than the material at the top of the pile. Never mind that when you sell a bucket you might actually measure out 1.1 buckets or 0.9 buckets. Then there is the other kind of shrinkage. Then employee who takes a couple of shovels full home. Inventory on things like this is always a guess. You use you historical adjustments to come up with an estimate. You take inventory to come up with your shrinkage.
All right, let's distinguish between accounts which are NOT subject to estimation and those which are! A provision, for bad debt or anything else, is by its nature probabilistic, and is part of the forward-looking process of accruals accounting. A bank account or credit card account should reconcile 100%. Ex post, so should "accounts receivable" - at the end of the day, either an invoice is paid, or it's adjusted or written off. Provisions are temporary.
What I said is that I'm not familiar (and comfortable) with a business in which there's a 10-20% margin of uncertainty in the relationship between volume of materials purchased for resale and volume sold (with no significant processing).
First, you're quoting me out of context. I quoted your suggestion in the previous thread in answer to the present question, and I was defending your approach to Allan Martin, who seemed to be taking a more rigorous approach. Second, you're talking about an average variance of 2%. JessiRight77's original question was talking about tractor loads containing 80-110 buckets, the current question refers to 55-60 yards sold from an initial purchase of
I realize you were defending my & had quoted the method I suggested in another thread. I was responding to the 100% reconciliation of accounts you said you require. I merely pointed out that such a thing is not always possible depending on the goods you deal with.
Why cost of goods sold?? If I paid for 30 yards but sold it as 35 yards, wouldn't the extra 5 yards simply be extra income with no cost associated - like getting an extra 5 yards free from the supplier??
Getting back to substantive matters, are there really businesses which have a 20% variance in the ratio of volume purchased to volume sold which the IRS signs off on? If so, then I think I should move into this field immediately ...
Consider a contractor. Customer calls him and describes problem. Contractor goes to wholesaler and picks up part. Then contractor goes to customer's location and installs part. Gets paid.
Did the contractor actually HAVE any inventory? Well, yeah, for about an hour, but is that hour of ownership worth tracking? I say no. If you agree, how long does it take to sell a truckload of product? A week? A month? Whatever the interval, is it worth your time and trouble to massage the bits?
Consider Denny's. They get 60 dozen eggs delivered each day. Can you imagine their computer system taking the trucker's ticket and diminishing their egg on-hand count by two (over easy)? Or entering inventory adjustments when an egg lands on the floor?
I, like the contractor, buy the stuff as cash out and credit COGS, maintaing no inventory at all. Then I'd sell individual buckets. On average, you'd be off half-a-load in the course of a year. Even so, at end of year, you could look out the window and estimate the pile to reduce that error.
Bottom line - if the product gets sold in short order, and absent some compelling reason to the contrary, I don't think it's worth the effort to track the product as inventory.
The income is already recorded. It is recorded on your invoices. What is wrong is the cost. While one way to look it is you ordered 50 and got 55, another way to look it is you got 55 but he charged you for only 50. It is the second way that you need to look at it. You adjust a COGS account cost when you make the inventory adjustment. What is happening is your average cost per unit was recorded higher than it actually was. You are adjusting it to what it should be, or bringing the cost back into alignment.
If your supplier is consistently giving you 55 yards and you order 50, then another way to handle it is cut the PO for 50, do an item receipt for 55 and when entering the bill for items received, just change the amount to what he charges you for the 50 you ordered. That will set the cost of goods for this item much closer to reality and the inventory quantity closer. This is the way you would do it for unit quantity items.
Let's start with something on you kitchen table. Grab a teaspoon. Shove it in the sugar. Pull it out. Call this one bucket. Was it a level teaspoon full or a heaping teaspoon full? Now try it with a different shape of spoon, say one that is deep but small in diameter. Level they should be the same, but heaping there could be a 20% variance. Finally consider the supplier may be selling heaping teaspoons and our poster is selling level teaspoons.
Now realize that teaspoon represents a skip loader bucket. No one in their right mind is going to level off a skip loader bucket in day to day operations. Geometry of the bucket can have an impact on how much is in it as well as the skill of the operator. Never mind that some can stick to the bottom of the bucket when it is being dumped. Actually 20% doesn't sound as impossibly out of line.
If you want to be domestic, when I'm cooking, and particularly when I'm making bread, I take good care to distinguish between a level teaspoon or a heaping teaspoon. If you're telling me there are people out there happily selling heaping teaspoons (or skip loader buckets) at the going price for level teaspoons, then - as I said - I need to move into those businesses, because we can seriously increase the amount of happiness in the world.
Then you should adjust your way of thinking, life isn't perfect and neither is accounting. That is why accounting is referred to as an "art" and not a "science".
The sages who wrote the Talmud grappled with the same question in trying to codify God's commandment: "Honest weights and measures you shall have." In some communities, a "measure" of grain (grapes, whatever), was level with the top of the measure, in other jurisdictions, the honest quantity was "heaping." After centuries of discussion, here's their decision:
Use the community standard: if level, level. If heaping, heaping.
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