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Handling stock inventory

Hi All

I’m pretty new on here and new to accounting in general, in fact I’m an electronic engineer trying to do accounting for a small company I created about 18 months ago. I’d appreciate if some kind folk would give me some guidance on what I should be doing from an accounting point of view.

I’ve designed a commercial product which I have yet to bring to market but I need to file my first year accounts shortly. I will 100% be filing as a micro entity.

I’ve recorded all purchases (equipment, it services, parts and services) all in the General Purchases category.

This is fine but now that I need to generate a P/L and balance sheet and don’t know how to handle the following:

  1. Part inventory
  2. Finished goods ready for sale.
  3. Equipment purchased

How do these items effect the balance sheet?

  1. Part inventory

My product has an integrated circuit that costs £4.80 each. I had to buy 1560 of them as a minimum order quantity which cost £7500

I have used 100 of them to build the first 100 fully assembled units.

So how do I show the remaining 1460 units stock on the balance sheet or do they just all get written off in my first years accounts?

  1. Finished goods ready for sale

I have had the finished product assembled by a manufacturer and now have 100 on the shelf. The fully assembled cost was in the region of £50 a unit. How do I represent this on the balance sheet?

  1. Equipment purchased

So I had to buy a significant number of pieces of equipment. Am I allowed to just write all this off in my first year of accounts or does this need to be done over several years?

I know this is a little lengthy and if it’s not an appropriate post I apologise.

Regards
Robert

Hi,

  1. Part inventory
    These components seem to be essentially raw materials. If you intend or expect to convert these components into finished items for sale within a 12 month period, then they are current assets.

Their value will be shown at cost price, so at your balance sheet date, it will show a value of 1460 x £4.80 = £7,008 (for Inventory - components)

  1. Finished goods ready for sale
    If these are finished goods ready for resale, they will be shown at cost price under current assets.
    So here they will be shown as 100 units x £50 = £5,000 (for Inventory - finished goods)

(If you’ve got part-finished goods, you might want to look at valuing work in progress, but you didn’t mention this in your post)

The current assets part of the balance sheet shows most liquid to least liquid, so there’ll be:

Current Assets
Cash in hand /at bank - £x
Receivables - £x
Inventory (£7,008 + £5,000) = £12,008

  1. Equipment purchased

For corporation tax computations you can claim Annual Investment Allowance on qualifying plant and machinery. As long as the items qualify, you can deduct their cost from your profit before tax figure. You would do this while you are preparing your corporation tax return for HMRC.

But for your business accounts, (not your tax computation) you would normally depreciate the items at a rate that you feel represents the estimated useful life of the items. It’s not particularly complicated, it’s just full of nitty-gritty.

Hope this helps.

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Can I make a suggestion. That if you are creating a product to sell. Then the purchases may not be deductable for tax purposes, but could be a capital asset.

I’d strongly advise seeking an accountant before you make a massive error once you’ve filed your accounts.

Hi Darren

Thank you for the explanation.

Quick question. When you Quote (Inventory - Components and Inventory - finished goods) is there somewhere in quickfile that I create these entries in order for them to appear on the balance sheet report?

I can’t seem to find how to make that happen?

Regards
Robert

Hi Paul

Thank you for your input, unfortunately I’m an engineer not an accountant so I’m not sure what you are actually telling me here sorry. :pensive:

I do have an accountant but he wants in the region of £1500+VAT to process my accounts. He says that even for a non-trading company he charges £600+VAT to process the accounts.

The company doesn’t have that kind of money at this time as I’m afraid as my initial investment is pretty much burned and I will need sales to generate more cash. That’s the reason I’m asking really. I know the sensible thing is to use a professional but circumstances dictate otherwise.

Essentially I have purchased some components and some equipment. I have turned part of the components into some finished goods and have the remaining components on the shelf. I was hoping that this might be straightforward accounting for someone a bit cleverer then me from an accounting point of view and if I could input it into the correct part of quickfile and generate the reports then I would be sorted.

If that’s simply not the case then I will need to try to find some way to raise the cash to pay a professional.

Thanks
Robert

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Would you be able to ask your accountant for advice as to the treatment of certain purchases? This may incur a small fee but no where near the cost to prepare accounts.

My basic point was that when you create an item for resell the parts bought in order to make such items may or may not be an allowable deduction for tax at the point of purchase, but instead may need to be placed on the balance sheet as part of the tangible fixed asset that you create with intention of selling.

Its a complex area that would need advising by an accountant so if you could find out what your accountant may charge for some small helpful advice it may pay in the long run.

My chart of accounts includes ready-made nominals for stock, work in progress and finished goods (1001, 1002 and 1003) but I’ve had my account for nearly 6 years and I’m not sure whether those get created automatically on newer QuickFile accounts.

As for moving the items from P&L to the balance sheet, that would be done with a journal. For the raw components you could debit stock and credit either “closing stock” (which will make your P&L show the 1560 you bought and the 1460 you have left as separate lines) or directly general purchases (which would mean P&L only shows as purchases the 100 you’ve actually used - the bottom line cost of sales and GP is the same either way).

For the finished goods the debit side obviously goes to “finished goods” but it’s less clear to me where the credit side belongs, this might be better answered by your accountant.

Thank you Ian, I’m looking at the journal entry stuff just now :+1:

Hi Robert,

Here are the entries you can make in Quickfile (QF) to deal with the integrated circuits.

I’m presuming you recorded the purchase of these at £7,500 into QF. That transaction would have been:

image

You’ll need to move them out of General Purchases and into Inventory - Components (Circuits). QF uses the word Stock and its code is 1001.

Here, you’ll use QF’s ‘New Journal’ page and this is what you would enter:

image

The above journal will move the £7,500 out of General Purchases into Stock (Inventory) - Components. This £7,500 represents the 1,560 integrated circuits, but you have used 100 of them and put them into finished units.

So you’ll use the next journal to move the 100 units, or 100 x £4.80 = £480 into Finished Goods.

image

This will give you this in your balance sheet:

£480 of circuits have been taken from Stock - Components and used in Finished Units.
They haven’t been sold so they are still assets. Presumably, you intend/expect to sell them in the next 12 months, so they are current assets.

You can do this in one journal if it all happens on the same date:

That’s how you get the Integrated circuits to show how you said you wanted them to show.

There’s another procedure to use when you make a sale which involves moving finished goods into a ‘cost of goods sold’ account to calculate gross profit. I’d be happy to post that here.

But this opens the issue of where the costs for the 100 units of finished goods you have on the shelf have been recorded?

At the moment it looks like:

image

To be able to deal with the £45.20 we’d have to know where/if it has already been recorded in QF.

Hope this somewhat helps.

2 Likes

Hi Darren

Many thanks for taking the time to do this for me, I really appreciate it. It makes sense but I have a couple of questions if that’s ok?

One thing to note is that I realised after looking into it that I did not get the goods built within the first years accounting period so I don’t actually have to account for the finished goods in this years accounts, but I will next year so I will proceed and do as you suggest in preparation for next years accounts.

I have created the entry for the integrated circuits as we discussed as shown below

It’s not quite £7500 as I remembered, it was £7150.35, but nevertheless. Can I just modify this entries code to be Stock (1001) rather than General Purchases (5000) or do I definitely need to go down the Journal route?

For your second question when I had the finished good manufactured I had to free issue a subset of the components to the manufacturer - those which I had already procured. I didn’t know how to do this at the time so I attempted to record it by making a sale with the value of the components that I had bought and the required quantity for the 100 units I was having built and discounted it down to zero or £0.01 as quickfile wouldn’t let me make it zero. I guess this is a good indication that I was doing something stupid but it was really only for recording how many I sent. This is the entry:

This included a few connectors, PCB and the TUNER IC we are discussing. Note that these come in environmentally sensitive packaging so 240 was the number sent to the manufacturer but they still have 140 on the shelf so I still have 1460 in stock

The entry for getting the units manufactured was recorded as a sub-contractor entry as I figured that was what it was

So how badly have I messed up? :pensive:

Again, thank you for your help and a Happy New Year.

Regards
Robert

Hi Robert

I may be wrong, but I think you’d have to delete the whole transaction/ purchase invoice and re-enter it to code it to Stock (1001).

That said, it might be better to do that because if you use a journal, there would be no link to the purchase record. That might not matter right now, but it can be a pain if in the future you have to look back into transactions and have to navigate through journals to remember what happened.

But for moving components from stock into finished goods in the future, I don’t know of another way in QF of doing this other than using journals

About free issue and sub-contractor costs.

If we deal with the movement of components first, and sub-contractor costs next.

When purchasing items of stock (Components), you can code your supplier invoices/line items directly to stock (1001).

QF will then record the double-entry as

Debit (Dr) Stock (1001)
Credit (Cr) Bank or payables (1200 or 2100)

When sending components free issue there are two things

Making a record for yourself
So that you have a record of which components you have sent to your manufacturer, use QF’s Purchase Orders (PO’s). You can enter lists of items you have sent and give each item a quantity of 1 and a price of £0.01.

You can just use the PO as a reference for yourself and never convert it to an invoice.

Carrying out the double entry:
Here, I’m afraid I don’t know any other way to move the cost of the components apart from using a journal. On the date that the components leave your stock, you’ll move their cost out of stock (1001) and into Work in Progress (1002)

The journal for this is:

Dr WiP (1002)
Cr Stock (1001)

When the finished goods arrive back to you, you’ll move the costs of the free issue components that you sent away, from WiP into finished goods (1003)

Dr Finished Goods (1003)
Cr WiP (1002)

There’s one more step but that doesn’t arise until you actually sell the finished items, I’ll mention it later.

This does involve a few journals and it can be tricky keeping on top of it, but this is the only way I can suggest right now. QF does have a Projects module, but I haven’t used it. Perhaps a look into assigning project tags to batches components could make things easier to track, but the double-entry will still be the same as above.

Recording Labour/Sub Contractor costs
In your example, your sub-contractor invoiced you for 100 completed units at a cost of £3,957.

You could consider this cost as direct labour costs since you are sending them out to be assembled and, not directly at least, incurring any production overhead costs.

It would be useful if QF would allow that the invoice you receive be coded directly to Finished Goods - Labour, but it won’t allow that and that code is locked, so I can’t set it to be used in purchase invoices.

So, when you receive your invoice you might want to code it to Productive Labour (6000). I guess you could continue to keep using sub-contractors (6002), whichever you prefer.

When you enter the purchase invoice, QF will do the following

Dr Productive Labour (6000) or Sub-contractors (6002)
Cr Creditors Control Account (Payables) 2100.

Once that is entered, you’ll need to move the assembly cost out of Productive Labour and into Finished Goods. I only know how to do this through a journal and the entry will be:

Dr Finished Goods (1003)
Cr Productive Labour (6000) or Sub-contractors (6002)

The above will deal with the assembling - labour costs.

Now, your finished goods account (1003) will contain the cost of all the components used in making 100 units, as well as the assembly cost of 100 units.

In your example, if the above steps were completed, your Finished Goods account would have the following balance:

image

The last step is the entries when you make a sale so that your Cost of Sales figures are correct for the Profit or Loss Statement, I’ll post these soon.

Hope this helps and feel free to message me too.

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Thanks Darren, that’s absolutely brilliant and exactly what I was looking for. I will make the changes and let you know how I get on. :+1:

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