Frequently Asked Questions

How does Bookkeeping treat inventory and calculate cost of goods sold?
Last Updated 7 years ago

The way that Bookkeeping treats inventory and calculates cost of goods sold is as follows. When inventory is purchased, inventory adjustments are input, or opening balances on inventory are set, the program calculates the average cost base for all items held in inventory. The calculation takes into account prior sales of items and the cost base that was used for those sales. Then when an item is sold the program uses the average cost base to calculate the cost of goods sold and apply this automatically to the ledger. If an item is sold but there is not enough inventory to cover the sales then the cost of goods sold is deferred until such time as enough inventory is purchased. Then the cost base at that time is applied to the sale to calculate the cost of goods sold. This works well for reseller type businesses.
Bookkeeping only supports the average cost base and does not support FIFO, LIFO, Highest first, Lowest first, or specified items methods of calculating cost of goods sold automatically.
Bookkeeping can now, as of version 4.1.4, be set to manual cost of goods sold. This means that the cost of goods sold amount is manually set on the inventory item instead of being calculated from the available information. This amount is used when calculating the cost of goods sold for a sale, however there must still be enough inventory to cover the sale before cost of goods sold is applied. This works in some other businesses where they want to manually set a fixed cost of goods sold for their items.
Bookkeeping does not yet cater fully for manufacturing types of businesses in a fully automated way however by using inventory adjustments it is possible to deal with manufacturing types of businesses. For manufacturing businesses it is necessary to periodically enter inventory adjustments to reduce the raw materials on hand and increase the finished products on hand and to adjust the values of inventory that might occur as a result of the manufacture of finished goods.
Bookkeeping also allows you to completely turn off cost of goods sold functionality for inventory. In this case there is no automatic cost of goods sold ledger entries. Instead on a periodic basis a journal entry needs to be entered to make the necessary cost of goods sold adjustments for sales during the prior period. There is an inventory turnover statement that can assist with calculating the correct values for the adjustment. This statement lists all sales and purchases of inventory items during a period and can be the basis for calculating the cost of goods sold via any valid method; however in these cases it would be expected that some external mechanism was used to assist with the calculations.
On our "wish list" is the capability for bill of materials support in Bookkeeping however this is not currently being worked on. Bill of materials support to assist or automate calculations for manufacturing businesses can be very complex or very simple and we are yet to decide what point along that line is suitable for the Bookkeeping program and the target businesses.

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