The Inventory module is where you do most of your processing work if you purchase and sell goods.
This module includes:
- The creation and maintenance of the inventory master file as well as related items.
- Inventory journals to adjust quantities and costs and/or enter opening balances.
- Purchasing from suppliers and selling to customers.
When you process sales or purchase transactions, the system updates a customer control account or a supplier control account in the general ledger. To keep the general ledger in balance, the system needs to create a contra entry. The contra entry can happen in two ways, depending on whether you wish to integrate inventory into the general ledger:
What it Does
No Inventory Integration
Sales transactions update an income statement sales account, and purchase transactions update an income statement purchases account.
The system maintains an inventory balance sheet account. This reflects the cost value of your inventory. The system creates additional general ledger transactions. For example, when you sell an item, the system moves the item's cost value from the inventory account to a cost of sales account. In some countries, the terminology for this method is "perpetual inventory".
If you do not integrate inventory, the general ledger does not automatically reflect any inventory activity. If you want to see a meaningful balance sheet, you need enter manual journals to bring the inventory account up to date. You would derive the value of these journals from your inventory reports.
Which method should you use? There is no simple answer to this question. Here are some considerations:
- If you are primarily a service organisation, and you do not sell many physical items, do not integrate inventory.
- If you mainly sell physical goods, you should consider integration.
- If you control your inventory accurately, and you do not allow the theoretical quantity on hand to be negative, you should integrate inventory.
- If your theoretical quantity on hand is often negative, and inventory costs vary considerably, non-integration is a better way to go.
You can use inventory groups for two purposes:
- To control inventory integration into the general ledger.
- To let you categorise your inventory into logical areas.
You must use inventory groups for integration, but you do not have to use them as categories.
An inventory group consists of a set of general ledger accounts. You link each inventory item to an inventory group. For integration purposes, you only need one inventory group. If you use the Setup Assistant to create a company, the system creates one or more inventory groups for you. Inventory groups control the amount of detail you can see in the general ledger. For example, you can create one inventory group for all your inventory items. All inventory activity will update the same general ledger accounts. However, you may need to see some key inventory values separately in your general ledger. For example, if you pay royalties on sales of certain items, you may like to see them separately in the general ledger.
You achieve this by creating additional inventory groups, each of which contains its own set of general ledger accounts. This gives you the analysis you require. You also gain two additional benefits:
- You can see the financial implications of groups of inventory items in your business.
- You can use general ledger budgets to budget inventory activity and track performance of these groups.
Integration accounts do not have to be unique per inventory group - you can use the same account in one or more groups. You can therefore have many groups, all sharing the same sales account but using a different inventory account, or the other way around.