COGS when invoice paid but stock not received

[antalp]

To calculate Cost of Goods sold it is normally Opening Stock + Purchases - Closing Stock = COGS

But.. I import and make lots of stock purchases that do not get received by the month end. I use TradeGecko for inventory management and for giving me the stock closing stock valuation.

My point is using the normal cogs formula and counting stock as purchases even when not received severely impacts the profit. It gets written down as COGS before it is even received.

The only way around is to ignore purchase invoices, enter them as payments on account until the stock is physically received, then increase stock purchased. Is this the normal practice?

 

[kevin.doran]

How about:

Opening Stock + Purchases - Closing Stock - Stock Not Received

 

[David Griffiths]

Simply count the goods not received as part of your closing stock, in the same way that you would if they were on the premises

 

[Paul Kelly ICHYB]

Regardless of where the stock is, if you paid for it, you should add into your calculations.

HOWEVER - your are calculating the value of your actual stock. COGS is the total of the components used on the items you have sold i.e.:

• Cost of items purchased for resale
• Cost of raw materials used to produce a product, or
• Cost of parts used to construct a product

 

[antalp]

Thanks, sorry for the delay, was not getting any notifications through.

The problem for us is as soon as its counted on the inventory system its classed as available for sale online. So only when we actually receive can we increase inventory value.

I think its best to use Opening Stock + Purchases - Closing Stock - Stock Not Received as Kevin states. Just wanted to know what the standard practice was.

 

[Paul Kelly ICHYB]

Remember, you are not calculating COGS.

Kevin, are you sure about Opening Stock + Purchases - Closing Stock - Stock Not Received.

You need to understand what antalp considers purchases (deliveries? Orders?) before that calculation can be used.

 

[kevin.doran]

Remember, you are not calculating COGS.

To the best of my knowledge that's exactly what the OPs looking to do as per his first line.

What's the difference between closing stock and stock not received in your eyes? I was simply breaking it down into layman's terms for the OP but perhaps we're coming at it from different angles.

 

[Paul Kelly ICHYB]

We probably are.

The fact that the OP is asking for COGS but using stock value means that neither of us know what he actually wants (or needs!).

 

[antalp]

I would love to post a reply but forum keeps saying I am posting a link when there is none in my reply.

 

[antalp]

Cheers guys but I think the formula for my situation is not correct.

My closing stock figure is the inventory valuation from inventory system at month end. This only includes actual stock sitting in the warehouse.

My opening stock comes from the Trial Balance

I used to do it as below, but my new bookkeeper is doing it in another way that is creating losses.

I purchased stock to Assets Stock, then at month end I would look at TB, look at closing inventory and just write down Assets Stock to COGS so Stock Assets matches the inventory value. This leads to losses as some of the stock I had not received and so my inventory system never had it in the inventory value in the first place. In effect anything not received was being written straight to COGS -we just retail BTW

I then started ignoring invoices and creating POA if I had not received the stock. When stock came then I created an invoice and added to Assets,Stock. But that is not ideal as I am ignoring the actual invoice date.

I think I should have two stock assets accounts. One for stock not received. Hence everything gets invoiced correctly, I ignore Assets Stock not received, for COGS and that works. Then when stock is finally received I journal the two stock accounts.

I am having trouble convincing my bookkeeper to do this. What they do is write all stock purchases direct to COGS. Then use my closing stock balance to increase my assets and decrease COGS.

The net effect is when I should have made profit I was in deep loss, because stock not received is being written to COGS immediately.

As we import from China there can be delays of months receiving stock. This must be common and I thought there would be a correct method for calculating but everything I search for assumes all stock is included. I can never know the true cost of goods ordered until I know the landed costs and I receive the items.

 

[Scalloway]

Have the goods not received been invoiced or paid for? If the cost of purchase has been included then it should be deducted from the cost of sales at the end of the period and included in stock.

 

[teddys]

@OP

If you have received a purchase invoice you need to account for it, for many reasons VAT being one of them. That said the accounting entries go something like this on any software system (I'm not expert on software though)

1. If you have received a purchase invoice you need to account for it on the same day because you may have to account for input VAT or if import then for foreign currency accounting reasons. So the accounting entry that your software would allow is:

Dr Purchases
Cr Supplier

2. When you make a payment again the software would allow the following entries:

Dr Supplier
Cr Bank

Where goods have not been shipped and have not been received by you obviously the system generated COGS value is a distorted one. So you need to either make a manual adjustment or rewrite the software to reflect the reality as follows:

1. The sum sitting in purchases but not represented by stocks should be transferred out to prepayments. This could be a simple entry like Dr prepayments and Cr purchases.

Alternatively if the goods are in transit, and if you're bearing all the risks of transport, you could debit stock in transit.

2. The entry then would be Dr Stock in Transit and Cr Purchases

If all the risk up to delivery are borne by the seller then you would go back to 1 above.

Your bookkeeper, I'm sure, takes instructions from you or your accountants and the current bookkeeping entries need correction.

 

[antalp]

Thank you all for your help. I will insist the adjustments are made correctly by my bookkeeper.