Double-entry accounting for non-dummies
September 20, 2012 5:39 PM   Subscribe

In a modern accounting system that uses double-entry accounting, I believe each line on an Income Statement reflects one or more GL account period *totals*, correct? Does that also apply to Purchases/Cost Of Goods Sold?

By "total" I mean both the debit and credit side of the GL accounts. The reason I'm asking is because we're trying to troubleshoot a problem with our Income Statement. We've found that the total amount of our vendor invoices for a particular period (e.g. we had $1000 of vendor invoices in Aug) corresponds to just the Debit side of Inventory Clearing, which is part of Purchases.

The Period Total includes $x on the Credit side, apparently from inventory receiving, and that's the wrong amount.

Every single other line on the Income Statement uses the Period Total amount from the corresponding GL accounts except for this one.

I've tried researching both on the internet and from some accounting books I have (I'm not an accountant) but nothing I've found goes quite into this much detail.

Is it actually possible that we'd want the report line to get its number from one "side" vs the Total? Or is there something screwy with our setup?
posted by edjusted to Work & Money (10 answers total)
I'm having trouble following your question, but don't you have an accountant who oversees your books? If not, I would suggest hiring one. This is their bread and butter.
posted by dfriedman at 6:05 PM on September 20, 2012

I'm having trouble with the question as well. Is the total of your Inventory Clearing account seemingly too high?

And yeah, I'd talk to your accountant rather than to folks on the internet - this seems like something that would require a pretty detailed look at your books to answer.
posted by natteringnabob at 6:16 PM on September 20, 2012

There are a number of valid reasons why current period purchases would not automatically be recorded as expenses/COGS.

Your reference to an Inventory Clearing account implies that you are also looking at the Balance Sheet, and that there is a rule in place that results in transfer of purchases to expenses. If you're the tool jockey try looking for differences in the settings for each of the invoices in your accounting software, or differences between the job codes (charge codes, expense accounts, etc) to which those invoices were applied.

Without looking at the financials/system directly it's not possible to give a 100% certain answer.

Disclaimer: I am an accountant but the value of my advice is equal to the fee paid to me :)
posted by kgbrion at 6:36 PM on September 20, 2012

Based on your question, I would say that you have a vendor that is not a standard purchases journal entry, and you are paying job cost like a vendor because the invoice is "hanging around". What happens is an invoice just kinda shows up, and a check writer just sits on the expense, and you don't have a crystal clear picture until a full 45 day cycle.

The problem appears when the income is booked at month end on a regular customer receivable that has an unrecognized payable which is unknown in a standard monthly closing cycle.
posted by vozworth at 7:17 PM on September 20, 2012

Do you have the ability to examine the detail entries that make up the GL account balances on the income statement? That would be where I would start.

I am an accountant and I work with a major software provider's huge accounting package.
posted by Altomentis at 8:00 PM on September 20, 2012

Also not sure if I follow your question but you would never look at simply the debit or credit side only of a GL account.
Note that inventory purchases for a period do not necessarily (or even usually) equal cost of goods sold for the same period.
posted by canoehead at 9:11 AM on September 21, 2012

Response by poster: Yes, I was thinking as I wrote the question that it might've been a bit confusing. Let me try to explain it a bit better (and again, I'm not an accountant, so please feel free to correct me if any of my assumptions are wrong). At the end of the month, if I print out a list of all our GL accts, I see a credit column, a debit column, and a period total (the total of the credits and debits).

Every line on the Income Statement appears to draw from the period total. e.g. sales, expenses, etc.

The exception we're running into is Purchases/COGS, where it seems like the only way we can get an amt that seems correct is by looking only at the debit side and not the credit side.

It would seem like this is an indication that we have a problem with our setup, and we're looking into that. However, I wanted to see if perhaps there *are* times when you would only want to look at one side (i.e. debit or credit) vs the total.

And yes, I know we should check with our accountant, and we're trying to work him in to the picture. The situation is just a bit complicated with perhaps too many chefs in the kitchen, all of whom know some accounting, but none of whom *are* accountants.
posted by edjusted at 9:43 AM on September 21, 2012

Response by poster: @kgbrion: correct re Inventory Clearing affecting Balance Sheet. Frankly, we're not quite sure that we're using Inventory Clearing correctly, and we're looking at how that's set up as a possible problem area.

@vozworth: hmm, that's an interesting point. One of the things we're looking at is how material receipts is affecting the purchase amount. I've been arguing that receipts should not affect the purchases GL acct at all, at least for the purpose of the Income Statement. But somehow, it is. Is that kind of what you're talking about?

@Altomentis: yes, and that might be part of what's throwing us off...because there's a lot of data to go through.

@canoehead: great! That's what I'm looking for...whether or not there are "legitimate" reasons for looking at just one side of a GL account. And re COGS: yes, I'm probably using not-so-correct terminology. I believe that on an Income Statement, COGS = Purchases plus inventory change, more or less? I'm talking about the Purchases part of that equation.
posted by edjusted at 9:52 AM on September 21, 2012

Any chance your COGS is handled as FIFO or average cost of current inventory rather than the LIFO that would give you the number you're expecting?
posted by thatdawnperson at 7:42 PM on September 21, 2012

Response by poster: @thatdawnperson: I don't believe that would affect the numbers I'm looking at but we'll look into that as a possibility.
posted by edjusted at 1:31 PM on September 25, 2012

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