[en] Knowledge Center

[en] This example will illustrate how inventory value is generated/calculated in RamBase.

[en] When goods are received in the warehouse, the goods will be registered on a goods reception document, called an SSA document. This document indicates goods reception or an inventory batch. The goods received in this reception, will always “live” on this SSA document for as long as they are in stock. That means that a Product (ART) can exist on several SSA documents at the same time. In the example above, the company already has 10 pcs in stock. That means that the product "Diode" will exist on (at least) two SSA documents. The status flow for an SSA document is as follows:

[en] When the SSA document is forwarded to Status 3, the accounting is affected. As previously mentioned, the value of the accounting inventory is calculated when the goods are registered as stock. This is usually before you have received the accounting document – the inbound invoice.

[en] The accounting inventory value is calculated based on goods receptions of SSA documents where the SSA documents are grouped by product. The total inventory value for each product is calculated and stored on a stock value register document - SVR document in RamBase. The Stock Value Register is relatively invisible for the user. The user will see the inventory subledger - Inventory Balances or INVBAL as the application is called. In the inventory subledger, there is one entry for each product, the opposite of the SSA documents.

[en] In the example above, the company had 10 pcs in stock already and therefore would have another SSA document holding information about those 10 pieces. In the inventory subledger there would be only one entry for the product "Diode". In this example, the inventory subledger would have displayed 30 pieces of "Diode" in stock to a value of 450 NOK.

[en] 450 NOK would be the accounting inventory value for the product "Diode". How the accounting inventory value is posted to the general ledger will be explained later. First, we will describe the purchase of the 20 pieces of the product "Diode" as in our example.

[en] When goods are registered as stock, the SSA document will be forwarded to Status 3 and the accounting inventory value will be calculated and posted to the general ledger. The general ledger account for inventory is debited with 20 pcs of the product, 300 NOK and the general ledger account for inventory change is credited accordingly. A value has been added to the general ledger. An asset account is debited, and a cost account is credited.

[en] Since an inbound invoice has not yet been received for this amount, a balance provision must be created to register the cost/debt obligation which the purchase has generated. If you just register goods to stock, this will give you a result that is too good. In theory, you might say that you have made an "accrual"  of the value added to the general ledger the day the goods actually were registered as stock and to balance your accounting, you need to make an "accrual" of the cost/debt obligation that this added value has generated.

[en] This is handled by the product sub ledger, or the PROBAL application as it is called in RamBase. The purpose of the product sub-ledger is divided in two. First, the application may be used to follow up inbound invoices (and credit notes for supplier returns) and second, the product sub-ledger automatically handles "accruals" of the cost part of the goods reception, as mentioned above.

[en] When an SSA is forwarded to Status 3, a posting in the product sub-ledger is created. The total of these sub-ledger postings will be transferred to the general ledger on a daily or monthly basis. The accounting for just this transaction is displayed in the example below.

[en] The GL account for inventory provision is credited and the GL account for Inventory provision change is debited. You have posted a debt obligation and the offset is posted as a cost of goods. When looking at the goods reception (from SSA) and the balance provision (from product sub-ledger) together, it will have the following effect on the P&L and balance.

[en] The P&L is not affected. The value added through inventory and the cost of balance provisions offset each other. In the balance, this is displayed as an increase of your inventory which is offset by a short-term debt obligation.

[en] The next step is to have a look at what happens when the company receives the inbound invoice for "Diode". To make it a little bit more complicated, let us say that the company receives an inbound invoice on only part of the goods reception. The company receives an invoice for 10 pieces of "Diode".

[en] It is important that the invoice is linked to the goods reception which is already transferred to your accounting inventory. RamBase has the functionality to control this, but nevertheless one should be aware of the rules. RamBase operates with different types/classes of Products (ART). A purchase should initially be registered as a Purchase order (SPO) and the goods should be registered as products with CLASS < V, for example P (part), M (materials), C (consumption) or K* (kits). These are physical goods that can be registered to stock. The purchase order will specify which warehouse Location (LOC) the goods are to be delivered to. When the purchase is registered in this way, you will have full system control when receiving the inbound invoice. Inbound invoices are normally registered from the Supplier invoice management (SIM) application.

[en] Direct costs such as power and telephone and purchase of services cannot be registered as stock. This type of purchase is viewed upon as requisitions or as costs (inbound invoice is registered directly) and products used will be class V (services) or X (costs). Requisition and cost invoices registered directly, will be created against warehouse location XXX – a virtual location which indicates that these are not goods to be registered as stock inventory. It is possible to register the invoice directly for costs or by checking the invoice against a requisition purchase order when posting the invoice, but there is no SSA document involved – cost and services cannot be registered as stock.

[en] When the invoice is correctly registered, the following will happen with the SSA document:

[en] When registering the inbound invoice, the following postings will be made:

[en] The increase of the inventory is still 300 NOK. The increase of the inventory provision due to the purchase is reduced to 150 NOK. The original posting to the product sub-ledger is closed and a new posting for 10 pcs. à 15 is created. The difference between the old inventory provision and the new is a result of the posting of the inbound invoice. Account payables increased with 150 NOK and is posted against a COGS account. This clearly shows the mission of the inventory provision. It works as an “accrual” of the debt obligation connected to the purchase. The cost accrues when the goods are received – it is then posted as a provision in the balance. When receiving the inbound invoice, the cost is realized, and the amount is moved from the balance provision to account payables/COGS.

[en] P&L and the balance will look like this:

[en] When goods are sold, this will affect the accounting inventory value. As mentioned in the beginning, the trigger point for a reduction of the accounting inventory value is when shipping goods out of stock – not when the outbound invoice is created. The sales process itself has additional effect on the transaction documents relating to the inventory values.

[en] Especially three fields that state quantity on SSA items should be paid attention to - the fields Quantity, Not invoiced Quantity and Available Quantity. Quantity refers to quantity registered as stock, Not invoiced Quantity refers to quantity that is not posted against an inbound invoice and Available quantity refers to the quantity that is free stock, meaning stock that is not reserved for a specific order/customer. In the example above we have an SSA item with Quantity of 20. An inbound invoice is received for 10 of these. Initially, the SSA item will have the following values in the quantity fields:

[en] A seller creates a sales order for the product "Diode". A customer has placed an order for 2 pcs. Automatic routines in RamBase allocate goods to the order and will link the sales order to stock when the order is created. At the same moment as the goods from the warehouse are allocated to the sales order, Available Quantity on the SSA item will be reduced. The SSA item will now have the following values in the different quantity fields:

[en] 2 pcs of "Diode" are allocated against a sales order and 18 pcs remain to be sold. The transaction so far has not had any impact on the accounting inventory value but you have an indication in the inventory sub-ledger that the inventory is reduced and soon will have an effect on the accounting inventory value.

[en] The accounting inventory value is calculated and transferred to the Stock Value Register (SVR). When ‘Available Quantity’ on the SSA item is reduced, it will show in the inventory sub-ledger but it will not reduce the accounting inventory value yet. On the SVR document for the article «Diode», you will see the following fields:

[en] In the example above, the accounting inventory value is 20 pcs of the product "Diode", à 15 NOK, altogether 300 NOK. The SVR document will now show:

[en] In the inventory sub-ledger, or the INVBAL report, this will be displayed as BacklogQty = 2, BacklogAmount = 30, StockQty = 20 and StockAmount = 300. This tells the accountant that the inventory value for the product "Diode" is 300 NOK, but shortly it will be reduced to 270 NOK. The value of "not-sold" inventory is 270 NOK. It does not affect the general ledger but might be useful information regarding period closure for companies where the changes in the value of inventory is a critical factor for the period’s P&L.

[en] The next step in the sale process is to release the order to picking and packing in the warehouse. This is made by transferring the Sales order (COA) to a Shipping advice (CSA) document. The Shipping advice (CSA) document changes Status codes according to the picking and shipping process. When the goods are waiting to be picked, the Shipping advice (CSA) document is in Status 2. The Shipping advice (CSA) document has Status 3 when the goods are ready for packing and adding shipment information. The Shipping advice (CSA) document has Status 4 when the goods are ready for delivery to the customer. When the Shipping advice (CSA) document is forwarded to Status 4, the accounting inventory value is reduced. At this moment, the balance and the P&L will be the following:

[en] We can see that the accounting does not balance. The debt obligations are higher than the assets and the costs are higher than the inventory change. This will give a deficit effect. The sale is done, the revenue is accrued but not yet realized/registered. There is no balance provision for accrued revenue not yet realized. However, RamBase will handle this.

[en] An outbound invoice is created by forwarding one (or several) Shipping advice (CSA) document in Status 4, which reflects the delivery, to an invoice. This is either done from each Shipping advice (CSA) document, from the application Customer invoice management (CIM) or by initiating automatic invoice consolidation. Regardless of how the invoice is created, the system will choose to post the invoice in the same period as the shipment/ Shipping advice (CSA) document. This means the revenue will be realized in the same period as it was accrued, which will give a correct result for the period. A requirement is that the period where the Shipping advice (CSA) document is posted is not closed when the invoice is registered. A good routine at period closure is to make sure that everything that could be invoiced, really is invoiced to avoid discrepancy between accrued and realized revenue. This will not be a problem when automatic invoicing/invoice consolidation is used since the invoice is created automatically based on deliveries being made. That means the revenue is registered as realized immediately after it is accrued. After the sale of goods, the accounting will look as this:

[en] The effect on the balance and P&L will look like this:

[en] The goods are sold without a profit which is not a good idea, but it works in our example. Debit and credit are in balance. To complete the example, we should make the last warehouse transaction and the inbound invoice for the last 10 pcs of the product "Diode".

[en] Since the SSA item has Not invoiced Quantity = 10, the Status for this SSA item is still 3. 10 pcs are not forwarded to an inbound invoice. When the SSA item has Status 3, the item will still be available in the application for inbound invoices (SIM). Inbound invoice for the remaining 10 is received and registered against the goods reception/SSA document item.

[en] Not invoiced Quantity on the SSA item will be 0 when the invoice is created (invoice has Status 1) and the SSA item will get Status 9. Please notice that the SSA item is not “dead” even though it now has Status 9. There are still 18 pcs on stock. The posting in the product sub-ledger will not be closed before the invoice is registered to Status 4. This prevents a time gap between the balance provision and posting of the COGS. The accounting effect of the dissolvement of the balance provision will be accordingly:

[en] The whole purchase/goods reception is now posted as account payables and COGS. There is no longer any balance provisions and the whole amount is posted as COGS in the P&L account. The balance provision is dissolved.

[en] Supplier invoices (SIN) in RamBase can be pre-registered before the Goods reception (SSA) document is registered. In that case, the Supplier invoice items (SIN items) must have a reference to a Purchase order (SPO). When a Supplier invoice (SIN) is registered to Status 3, the DOCTYPE and TYPE fields on the Supplier invoice (SIN) are updated to PREREG, and the Supplier invoice (SIN) will appear as Pre-Registered in RamBase. Pre-Registered Supplier invoice items (SIN items) will be picked up by a batch job that will check if the goods are received on the specific Supplier order item (SPO item) that the Supplier invoice item (SIN item) has a reference to. If the SSA item(s) is found, the system will try to link the Supplier invoice item (SIN item) to the SSA item(s). When all items on a pre-registered supplier invoice (PREREG SIN) is linked to SSA items, the Supplier invoice (SIN) will be automatically registered to Status 4 by the system when the SSA item is registered to Status 3.

[en] When pre-registered Supplier invoices items (SIN items) are linked to Purchase order items (SPO items) and waiting for goods, they will stay in Status 3 until all goods are received. This means they will not be part of the Supplier balance (SUPBAL) and general ledger balance; they will not be included in the VAT report and could not be handled by the remittance process in RamBase. However, it is possible to register these SINs to Status 4, so that they will be a part of the SUPBAL and general ledger balance. When the SIN is registered to Status 4 it will receive a Product account transaction (PAT) document and it will be included in the Product balance (PROBAL) application as Invoice registered - Waiting for goods. These transactions will also be part of the PROBAL that is imported to the general ledger. These PAT documents will be closed when goods are received, or if a purchase order is cancelled.

[en] Finally, we describe the postings of the inventory changes in the general ledger. As previously described, the value of the inventory and inventory provision are held outside the general ledger in the applications Inventory balance (INVBAL) and Product balance (PROBAL). The transfer to the general ledger is either done automatically once a day or manually at period closure. The transfers are displayed in the application for Period closure (PAR) and this is also where manual transfer to the general ledger is conducted.

[en] Below is a description of the postings to the general ledger.

[en] It is important to see the changes on the inventory value since this influences COGS and gross margin for the period. The change in inventory value for the above example of the product "Diode" can be described in this simple calculus. Only the inventory is described in the calculus:

[en] How the inventory change is handled in RamBase:

[en] The inventory transaction in RamBase can be described like this:

[en] The effect on P&L and balance:

[en] It must be mentioned that the effect on COGS and gross margin alone cannot be deduced from these figures. Please remember that the balance provision is gradually dissolved so that a reduction of the provision will always have a corresponding value in COGS and thus have a zero-effect on COGS and gross margin. It should also be mentioned the importance of following up the product sub-ledger. If the provision sub-ledger contains provisions where the reception of an inbound invoice is unlikely, these provisions should be zeroed out, otherwise the provisions will be posted as provisions which effects the COGS and gross margin when they should not.