Purchase order posting is a very common process in a business and is done on a daily basis.
The financial impacts of the postings, therefore, form a very important aspect for a business.
Postings happen only once the Receipts are posted. Confirmations and registrations do not have any physical or financial impacts in the system.
Product Receipt: A receipt is what confirms that the Items (stocked, tangible items) have been received into the inventory/ stock. Once the Items are in, only then there are impacts to the Ledgers.
When a product receipt is recorded for a
stocked item, two accounting processes take place:
One accounting process creates an
accounting entry for the accrued liability. The accounting entry amount is for
the received quantity of the stocked item, multiplied by the currency amount
per unit for the purchase order. In the following example, ### denotes the
currency amount of the accounting entry.
Debit Purchase expenditure, un-invoiced ###
Credit Purchase, accrual ###
Another accounting process accounts for the
cost in inventory for the received quantity of the stocked item by crediting
the expenditure ledger account and capitalizing the cost in an inventory asset
ledger account.
Debit Product receipt ###
Credit Purchase expenditure, un-invoiced ###
Purchase Invoice: When an Invoice is posted, it indicates that the Vendor has issued a bill for the goods that have been transferred. A Vendor Invoice is what creates the liability towards the Vendor.
When a vendor invoice is recorded for a
stocked item and accounting entries are created, two accounting processes take
place:
First, the accounting entries on the
product receipt for accrued liability are reversed. The amount that is reversed
is based on the quantity of stocked item on the vendor invoice that is matched
to the product receipt. Then, the accounting entry is created to record the
liability for the vendor invoice. .
Credit Purchase expenditure, un-invoiced ###
Debit Purchase, accrual ###
Debit Purchase expenditure for product ###
Credit Vendor balance (Accounts payable) ###
Second, the accounting entry on the product
receipt that records the inventory cost is reversed. The amount that is
reversed is based on the quantity of the stocked item on the vendor invoice
that is matched to the product receipt.
Additional account entries are created
to record the inventory cost under a new inventory ledger account
classification.
Credit Product receipt ###
Debit Purchase expenditure, un-invoiced ###
Debit Purchase, product receipt ###
Notes:
Where the Inventory runs on Weighted Average costing, there is a chance that the Vendor accounts and the Inventory accounts are posted with different amounts. These differences are in tandem with the Calculations that the system does for arriving at the Weighted Average cost of the Item.
