The purpose of this article is point out the fundamental differences between transactional inventory accounting, and simple inventory accounting. This can often be a intimidating topic due to the complexity and because ultimately, the financial statements could be at risk if done improperly. 

This article should be treated as a guide towards understanding how the system works. The way this is implemented could be very different from company to company and due diligence should be performed whenever making dramatic changes to your accounting system. All of this being said - don't be scared. Let's work together to make the right decision for the well being of your organization. 

You may find this article to be semi-biased. This is by design. I am a huge advocate that transactional inventory accounting is the right decision with few exceptions. However, I will explain the pros and cons of each.

This article is intended for CPAs, Controllers, CFOs and anyone who is interested in understanding how Global Shop is capable of tracking periodic or perpetual inventory accounting data, and how that affects the General Ledger and financial statements.

Simple inventory accounting (a.k.a. periodic inventory valuation) is a configuration where your inventory data is semi-integrated with your Chart of Accounts. Transactions like PO Receipts, Adjustments, WIP to Finished Goods, Shipments, and COGS related functions are not journalized automatically. Instead, they are tracked in the sub-ledger (the database) and not in the General Ledger.  Instead, the Controller/CFO will run a series of reports at the end of the month, including Inventory > Transactions > Simple Inventory Accounting

As you can see, this screen allows you to select a cutoff date (end of month), Product Lines, Locations, and Groups. The cutoff date is going to reverse calculate the value of inventory and WIP as of that date. The report is looking for inflows, and outflows that have occurred since the last time you ran the report. This is going to ascertain the balances of your inventory - which in turn will allow you to calculate your cost of goods sold. 

The "Status Summary" will allow you to print the Inventory Status, WIP with Cutoff, and Shipped Not Invoiced reports. These are the reports that the system will use to book the journal entry, that is generated from the "Create/Print JE" button. The calculations for the Journal Entry can be found in the Global Shop help documentation for this menu item.

It is imperative that you properly configure your Accounting Groups for your Raw Material and Finished Good Product Lines so that the system is aware of where to make adjusting entries. All in all - this is still an accurate way to calculate inventory and cost of goods accounting balances.

Transactional Inventory Accounting explained:

Opposite to Simple, Transactional Inventory Accounting (a.k.a. perpetual valuation) presents a total integration between the Sub-Ledger and General Ledger. Every inventory transaction in Global Shop is represented by a "transaction code". These transaction codes along with a specific product line and a location are assigned a debit and credit account. Each time a transaction is processed, the debit and credit accounts are transacted accordingly. 

The "Material Transaction Accounts" tool is where the magic happens. As you can see, you will select a transaction code, location and a product line. Once you have selected these, you can choose the appropriate debit and credit account. (Note: If you use the "FLOOOM" options, you may have multiple debit/credit accounts.) As an example, TC "J52" represents a WIP to Finished Goods. This transaction should debit the Finished Good inventory account, and credit your WIP account(s). Another example is TC "P16" represents a manual inventory adjustment. This one is a little complicated - because you could be adjusting up, or down. However, Global Shop assumes a favorable adjustment. Therefore, the debit account should be the inventory asset account for that product line, and the credit account should be your inventory adjustment expense (COGS) account. If the adjustment is unfavorable then the system will do a negative debit and a positive credit. A full list of transaction codes, and appropriate debits/credits can be found in the Global Shop help documentation. 

Once your Material Transaction Accounts ("MTA") are configured, you need to get the system to actually journalize the transactions. These transactions are posted in batches by using the "Create Inventory GL Batch" wizard. This process will query the unposted inventory transactions and match the records with an appropriate MTA record. This is added to a Journal Entry batch, and ultimately posted as of your cutoff date. It is very important to remember that when you run this tool, you cannot run it again for the same transactions. Therefore, if you run the tool and there are transactions that don't have an appropriate MTA record, they will be ignored. Since you can't run the record again - you inevitably lose the opportunity to post the transaction to the General Ledger. On the audit report that prints, there is an asterisk (*) that will print on the right side of the record indicating that it was not posted. Thankfully, Global Shop has a feature that will allow us to check for these before it is "too late". Inventory > Reports > Preliminary Inv. Audit Trail (No JE) will effectively do the exact same as Create Inventory GL Batch except it will not actually post the batch and can be run infinitely for the same period. For that reason - you will want to run this report first. If there are any asterisks (*) then you should find the missing MTA and re-run the report. When you are sure there are no asterisks (*) remaining - run "Create Inventory GL Batch" and post.

What about reconciliation?

Good thing you asked! Reconciliation of your accounts is still a very important part of a proper month end close process. Much like the Simple Inventory Accounting reports, Global Shop has reports like Inventory Extended Status with Cutoff, WIP with Cutoff and Shipments Not Yet Invoiced. These reports should be used to reconcile your general ledger accounts. In a perfect world, only small adjustments should be necessary. Generally they only occur due to timing issues. If you have continuing or growing variances that you are adjusting for - then you likely have a misconfigured MTA or you have a process issue (i.e. backdating, late cost to jobs, etc.) that needs to be found and extinguished. If you need help, fill out our contact form below. We will be happy to provide the forensic accounting required to find the issue. 

• Simple Inventory Accounting

  • Keep it simple stupid: This method is designed for simple chart of accounts. If you need a complex CoA configuration then consider switching to Transactional.

  • Be diligent about running the Simple Inventory Accounting method as close to the end of the month as possible, since reconciliation at a transaction level is near impossible.

  • Save your reports. If you ever have an issue, you will want to refer back to the report as it was when you posted the adjustments. Unlike the reports in transactional inventory accounting - you cannot re-run the reports later.

• Transactional Inventory Accounting

  • Preliminary Inventory Audit is always run prior to the inventory batch to ensure there are no asterisks (*).

  • Inventory Batches are posted on a daily basis in the mornings, for the previous day.

  • Evaluate your MTAs quarterly to ensure that the desired result on your financials is still being achieved.

  • Take advantage of the complex configuration. Instead of just setting it up, think about what capabilities you would like to take advantage of, like product line based P&Ls.

• Simple Inventory Accounting

  • Incorrect/Missing Accounting Group Configurations

  • Incorrect Product Line Configurations

  • Missing/Incorrect Partial Receipt Percentages

  • Incorrect Inventory Accounting Options

• Transactional Inventory Accounting

  • Incorrect/Missing Material Transaction Account Mapping

  • Running Inventory Batches without Preliminary Report First

  • Incorrect Product Line Configuration

  • Back-Dated Transactions

  • Timely Batch Postings

  • Incorrect Inventory Accounting Options

• Global Shop Help > Menu Topics > Inventory > Transactions > Simple Inventory Accounting

• Global Shop Help > Additional References > Inventory Accounting

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If you are excited to implement one of the above methods, or just need an audit of your current configuration but are intimidated, inquisitive or just really want to work with an expert - fill out the form below. We will respond back asap to discuss how we can move forward and simplify your success.