If your business buys stock to sell or to make products, the same purchase appears in your accounts twice. Count it once.
What is inventory?
Inventory is stock: goods bought to resell, or materials bought to make products. Until it is sold, it sits on the balance sheet as an asset.
Why does the same purchase appear twice?
You buy the stock. The supplier invoice is recorded in an inventory account.
You sell the stock. Finance moves its cost from the inventory account to cost of goods sold, an expense account.
The same dollars pass through both accounts. If you include both, you count the purchase twice.
Which one do I count?
Count the purchase, where the supplier invoice first lands. Leave out cost of goods sold.
There are two reasons:
Purchased goods and services counts goods bought in the reporting year, whenever they are sold.
The inventory account holds the supplier invoices, with supplier names and descriptions. Cost of goods sold is usually a bulk journal with neither.
How does my finance system record stock?
Ask your finance team which of these applies.
Set-up | Where stock invoices first land | Include | Exclude |
Stock recorded as an asset (common in NetSuite, SAP, JD Edwards) | An inventory asset account | The inventory account | Cost of goods sold, stock adjustments |
Stock recorded as an expense, adjusted at year end (common in Xero, MYOB) | A Purchases expense account | The Purchases account | The year-end stock adjustment |
What if I only have cost of goods sold?
Work out purchases from your trial balances:
Purchases = cost of goods sold + closing inventory − opening inventory
For example: cost of goods sold of $1,380,000, opening inventory of $420,000 and closing inventory of $465,000 give purchases of $1,425,000.
Avarni has no setting to apply this adjustment. Ask your finance team for the purchases themselves. If you cannot get them, use cost of goods sold and record the difference in your Basis of Preparation.
What about the other stock accounts?
Stock passes through several holding accounts. Count each purchase once, where the supplier invoice first lands. Leave out the accounts it moves through after that.
Account | What it holds | Usual treatment |
Raw materials | Materials bought to make products | Include, if supplier invoices land here |
Work in progress | Materials moved into production | Exclude. The materials were counted when bought. |
Goods in transit | Stock shipped but not yet received | Include only if supplier invoices land here first |
Goods received not invoiced | A liability waiting for the invoice | Exclude |
Stock write-offs, shrinkage, stocktake adjustments | Stock that was lost, damaged or recounted | Exclude. Not a purchase. |
Provision for obsolete stock | An estimate of stock that will not sell | Exclude |
If you are not sure where invoices land, ask your finance team. Do not guess.
Is stock a capital good?
No. Stock is Purchased goods and services, even when the items are expensive, such as vehicles a dealer buys to resell. Capital goods are assets you use to run the business.
What else can hide inside the cost of stock?
Freight on incoming goods. Some businesses add it to the cost of stock. If it is material, ask finance whether it can be separated, so it counts as Upstream transportation and distribution.
Labour and overheads (manufacturers). These can be added to the cost of stock. Labour is not a purchase. Overheads can include energy you already count from your electricity bills.
What this means in Avarni
Set inventory and raw materials accounts to Purchased goods and services. Avarni's AI may suggest Capital goods for them. Change it.
Set cost of goods sold, stock adjustments and write-offs to Excluded, if your stock invoices land in an inventory account.
Stock lines often have short, generic descriptions. The supplier name tells you more about what was bought. Use supplier-based classification rules for stock accounts.