Understanding Accrued Inventory

As soon as you receive a shipment of inventoried items, aACE processes the receipt of goods to make the items available for outgoing orders. However, your team may enter the vendor's corresponding invoice at a later date. To properly reflect the value of the inventory that has been received, but has not yet been entered as a payable, aACE can make a temporary entry to the Accrued Inventory account — a liability account in the general ledger created for this purpose.

Example of Accrued Inventory

This guide follows a transaction through the system to see how it affects inventory records and GL accounts. 

Items Ordered

Suppose that aACME Education creates and opens a purchase order for 100 lab notebooks at $2.50 each:

At the Inventory Lots module, search for the LIC, then click the Lot number. aACE displays the entry that has been made to Inventory: 100 notebooks on order. At this point, aACME Education has neither received nor purchased any of the notebooks, resulting in a zero liability.

Items Received

For this example, aACME Education receives a partial shipment of ten notebooks:

aACE updates the Inventory Lots module to show that they have received ten units (i.e. assets worth $25.00) that are now available for customer orders. However, aACME has not received an invoice from the vendor, so zero units have been purchased: 

The General Ledger also reflects these balances. From the PO, click Admin Actions () > Go to Related General Ledger Entries. 

For this example, the Textbook Inventory account shows the debit entry value of $25.00 for the received notebooks. To accurately reflect the liability, the Accrued Inventory account carries the balancing credit value of $25.00 for goods not yet purchased:

Items Purchased

aACME Education has received an invoice from the vendor, and can now processes the purchase record for the ten received notebooks. (Note: If needed, they could also record any transportation charges in the +Freight column, helping to track the landed cost for the notebooks.)

aACE updates the Inventory Lots module from this purchase, noting that the liability has moved from Accrued Inventory to the Accounts Payable account.

Navigate back to the General Ledger and locate the related records. It now shows the three pairs of entries that kept aACME's accounts balanced throughout the transactions:

1. Entries for the accrual (highlighted in green ovals) — These represent goods received, but not yet paid for. They increase both the inventory asset account and accrued inventory liability account.
2. Entries for the purchase (highlighted in purple rounded-boxes) — These increase both the inventory asset account and accounts payable liability account.
3. Entries reversing the PO (highlighted in red boxes) — The previous entries were temporary values pending the purchase of the goods, so these entries reverse the initial set.

Summary

The accrued inventory balance reflects the value of the difference between goods received and goods purchased. For POs where the quantity purchased matches the quantity received, the balance in the Accrued Inventory account will be zero. 

Additionally, if you manually close a partially filled PO, you tell aACE that no additional purchasing is going to occur. aACE will then zero out any remaining accrued inventory balances.

Configuring Accrued Inventory Settings

To activate the Accrued Inventory feature, navigate from Main Menu > Accounting > Accounting Preferences > Chart of Accounts. At the Balance Sheet Accounts tab, click Edit. From the Liabilities section, click the Accrued Inventory dropdown list and select the correct account. Click Save. 

To deactivate Accrued Inventory, clear the selection from this dropdown list and click Save.