Pre-Setup ConnectWise Inventory > The Function of Inventory

Overview: Function of Inventory

One of the key benefits of using ConnectWise IV is to ensure that your Profit & Loss (Income Statement) maintains a level of uniformity in the allocation of costs against revenue when a product is purchased and sold. Without the use of the inventory module (together with the Wise-Sync Inventory feature), goods procured would directly hit a Cost of Goods Sold (COGS) account at the time of purchase. Where with the IV module, COGS are only booked at the time of where the asset is sold. 

The use of inventory is not limited to "Warehousing" and can be applied to situations where large up-front costs are incurred for the purpose of sale under either a project or where there is a potential delay in the invoice to the client. The last thing that a business owner wants is an "Odd Income Statement" where large expenses are booked to COGS in the prior month causing an on-paper loss, with income being booked in a proceeding month creating an abnormal profit.

When ConnectWise Inventory is active, and "Inventory" Class products are bought and sold via a Warehouse, Wise-Sync will handle the corresponding accounting transaction that provides for the adjustment of your balance sheet account (Inventory) at each warehouse location, allowing for correct allocation of transactions to your COGS account when goods are sold.

The accounting flow is detailed as follows:

The first step is when the Asset is purchased through ConnectWise Procurement, following the creation of a Purchasing Demand from a Ticket, Sales Order, Project or directly on an Invoice or Purchase order.

Purchase Transaction (Purchase Order - PO1234)
DateAccount TypeDebitCredit
Goods Procured into Warehouse 14/02/2014Inventory
Tax Liability14/02/2014Tax (@10%)
Accounts Payable14/02/2014Accounts Payable$11,000

The above transaction completes the necessary allocation of your tax liability, and posts the invoice to Xero, for payment as per your normal Accounts Payable Processes (and corresponding supplier terms).

At this time (assuming this was the only transaction into your Inventory Asset account), the Inventory Balance in Xero will be: $10,000

The next step is when the Asset is sold to the customer (via a CW Miscellaneous / Product Invoice)
Invoice Transaction (Client Invoice - INV1324)DateAccount TypeDebitCredit
Goods Sold to Client (Sale Margin of 30% GP)15/03/2014Revenue
Tax Collected15/03/2014Tax (@10%)
Accounts Receivable15/03/2014Accounts Receivable$14,300

The Above transaction books the revenue, at the time of sale. The sale is then allocated to Accounts Receivable, for payment by the client.

The next step, processed at the same time by Wise-Sync is a Manual Journal, affecting the Asset Account and Posting the corresponding COGSbased on the defined Inventory Costing Model.

Inventory TransactionDateAccount TypeDebitCredit
Goods Sold from Inventory15/03/2014Inventory
Cost of Goods Sold (Client Invoice - INV1234)15/03/2014COS$10,000
The corresponding two options show the Income Statement (P&L Statement) and Balance Sheet for both a company with IV and one without:

Income Statement

Company A - Not Using Inventory

Month 1Month 2Month 3
Income$ -$ -$13,000
Less Cost of Sales$ -$10,000$ -
Net Profit$ -($10,000)$13,000

Company B - Using Inventory

Month 1Month 2Month 3
$ -$13,000
Less Cost of Sales
$ -$10,000
Net Profit
$ -$3,000

The above income statement shows the corresponding Income and Cost of Sales for Company B into the same month providing for a more normalised Income Statement. Where Company A appears to have made a significant loss in the second month. This can hinder financial reporting when reporting on Month 2 in isolation.       

Balance Sheet

Company A - Not Using Inventory

Month 1Month 2Month 3
Inventory - Warehouse A$ -$ -$ - 
Inventory - Warehouse B$ -$ -$ -
Total Current Assets$ -$ - $ -

Company B - Using Inventory

Month 1Month 2Month 3
Inventory - Warehouse A$ -$ -$ - 
Inventory - Warehouse B$ -$10,000$ -
Total Current Assets$ -$10,000$ -

Paul is the author of this solution article.

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