It becomes one the moment goods change hands. Between those two events sits everything that goes wrong with inventory buying.
An inventory purchase passes through four states. Committed, when the purchase order is issued and nothing has posted to the ledger. In transit, when title has passed and you own goods you cannot touch. Received, when the units are physically yours and the inventory asset rises. Billed, when the supplier's invoice converts a placeholder into a payable with terms. Most sellers track the first state and the last state, and the two in the middle are where the money actually sits at any given month end.
Committed. Nothing. A purchase order is non-posting. It exists so you can see open commitment against cash planning and so the receiving side has something to match against. Booking a payable when you place an order is a real error, and it happens more often than you would expect in files where the purchase order and the bill are the same screen.
In transit. Debit inventory in transit, credit accrued purchases. This entry is skipped in the overwhelming majority of ecommerce books, and it is why a seller with six weeks of ocean transit understates assets for six weeks at a time.
Received. Move value from inventory in transit to inventory on hand at the receiving location. If you never booked the in-transit leg, this is where the inventory asset appears from nowhere.
Billed. Clear the accrual, establish the payable, and record any difference between what you accrued and what the supplier actually invoiced.
The International Chamber of Commerce publishes Incoterms, currently the Incoterms 2020 edition, in force since 1 January 2020, which defines eleven rules for international sale of goods contracts. Each rule answers when risk transfers from seller to buyer and who bears which costs.
That answer is your ownership date. Under FCA, risk passes when the goods are handed to the carrier the buyer named, which for a container leaving Shenzhen might be six weeks before it reaches your warehouse. Under DDP, the seller carries risk all the way to delivery, so nothing is yours until it arrives.
Two sellers with identical containers and different Incoterms have legitimately different balance sheets on 30 September. If nobody in your business can say which term your supplier contracts use, that question is worth an afternoon, because it determines whether a quarter-end container is your asset or somebody else's.
This is the account that tells you whether the loop is closed. It holds the value of goods you have received and not yet been billed for. It should exist, it should be small relative to your purchasing volume, and it should turn over at roughly your suppliers' billing cadence.
A schedule at 30 September:
| PO | Supplier | Ordered | Received | Billed | Received not invoiced |
|---|---|---|---|---|---|
| 4412 | Supplier A | 38,400 | 38,400 | 38,400 | 0 |
| 4418 | Supplier B | 22,750 | 22,750 | 0 | 22,750 |
| 4421 | Supplier C | 61,200 | 45,900 | 45,900 | 0 |
| 4426 | Supplier A | 17,300 | 17,300 | 12,900 | 4,400 |
| 4430 | Supplier D | 9,800 | 0 | 0 | 0 |
| Total | | 149,450 | 124,350 | 97,200 | 27,150 |
Read line by line, that table is a to-do list.
4412 is complete. Nothing to do.
4418 is 22,750 of goods received with no invoice. Normal if Supplier B bills monthly and this arrived on the 26th. Accrue it and move on.
4421 received 45,900 of a 61,200 order. The open 15,300 is either still in transit or was short-shipped, and those are different transactions. If the Incoterm passed title at origin, the 15,300 belongs in inventory in transit and it is already your asset. If the supplier simply did not ship it, the purchase order stays open and nothing posts.
4426 has a 4,400 gap between received and billed on a fully received order. Either a second invoice is pending or there is a price or quantity discrepancy that a three-way match would have caught before payment.
4430 is committed only. No entry.
The period-end journal is a debit to inventory of 27,150 against a credit to accrued inventory purchases of 27,150.
Leave it out and inventory is understated by 27,150 and accounts payable is understated by the same amount. On a balance sheet carrying 480,000 of inventory, that is a 5.7 percent understatement of the largest asset most sellers own.
The income statement damage arrives a month later. Those units sell in October. Their cost was never capitalized, so it lands in October as a lump when the invoice finally posts. September gross margin is overstated, October gross margin is understated, and the swing between the two months looks like a business problem rather than a bookkeeping one.
Do this every month for a year and the pattern is a gross margin line that moves two or three points month to month for no reason anyone can name.
The most common shortcut in inventory purchasing is to receive whatever arrived and close the purchase order. It is fast, it makes the open PO list look clean, and it destroys the only record you had of what you are still owed.
A partial receipt should leave the order open at the outstanding quantity. Then the open PO report answers a question that matters: what have I paid for or committed to that has not arrived? Purchase orders inside ConnectBooks are created in the platform, support partial receipts, and can be downloaded as a PDF. Sending them to the supplier is still a manual step, done from your own email, which is worth knowing before you build a process around it.
Short shipments also need a decision on landed cost. If freight was charged on the space actually shipped, the allocation base changes. If the units shipped and then vanished, the freight was consumed and the loss is a shrinkage event at fully allocated cost. Working that through properly is the subject of allocating landed cost across a mixed container.
A 30 percent deposit against a 61,200 order is 18,360 of cash that is not an expense and not inventory. It is a prepayment, an asset, and it clears against the eventual bill.
Booking it to cost of goods sold at the moment of payment is a straightforward error that overstates cost in the month you paid and understates it in the month you sold. Booking it to inventory is subtler and also wrong, because you do not own anything yet. It belongs in a supplier deposits or prepaid inventory account until the goods are yours.
The reason to do all five is that inventory is usually the largest number on the balance sheet of a product business and the only one that is not confirmed by a third party. A bank balance is verified by a bank. Inventory is verified by you.
The inventory layer holds stock by warehouse with FIFO valuation and an audit trail on adjustments, and cost of goods and adjustments post automatically into your accounting system based on settlement data, including QuickBooks Desktop and Enterprise. The purchasing side still requires the routine above. Software closes the loop it can see, and it cannot see the invoice sitting in somebody's inbox.
Running an e-commerce business comes with plenty of challenges, but ConnectBooks is here to make your life easier. With real-time insights, seamless integrations, and detailed tracking of your profitability and inventory, you can stay ahead of the game. Whether you’re selling on Amazon, Shopify, Walmart, TikTok or eBay, ConnectBooks helps you manage your finances with 100% accuracy and confidence, so you can focus on growing your business.
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