 Zero Accounting Software 2023 Purchase of Inventory Using Bank Feeds Periodic Method versus a Perpetual Method of Tracking the Inventory. Get ready to become an Accountant Hero with Zero 2023. Here we are in our first award from our sponsor. Well, actually, these are just items that we picked from the YouTube Shopping Affiliate Program, but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased, and used ourselves. Focusrite Scarlett Solo Third Gen USB Interface with Software Suite. I've been using a Focusrite for years for my audio needs before which time I had a USB microphone which plugged directly into the computer, but I think you'll find as I have found, if you want to increase the quality of your microphone, you will need an interface and the Focusrite is the go-to interface as far as I'm concerned. I've been using this for years now. It works well. It's easy to use. It seems quite durably built because I only do the screen recordings. I only need the one Solo interface. However, if you have multiple microphones you need to plug in or if you have other instruments you need to plug in, you can look at a similar model that has more input ports. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model given you access to all the courses, courses which are well organized, have other resources like Excel files and PDF files to download and no commercials. Our custom zero home page going into the company file we set up in a prior presentation, the bank feed file. We're going to duplicate some tabs to put reports in like we do every time. Going up top right clicking on the tab and duplicating it and then we'll right click on the tab again and duplicate the tab again. Let's go back to the middle tab accounting drop down. We want to open up the balance sheet report and then we'll tab to the right accounting drop down open up the profit and loss report. And then on the P and the L I'm going to do the date range chain bringing it back to 2022 which is the same date range as our data input from the bank feed. So I'm going to go to January 2022 it should be and then December of 2022 and the end of it. And we will then update the January didn't take it didn't take just impacted on the surface. So there we go. We're going to update it. All right. And so then we're going to go back to the first tab here and now we're going to go into our accounting drop down. Let's go to our bank accounts. This is what happened when we uploaded the bank feed information. We've got our bank account drop down. I'm going to go into the account transactions and then we're going to go into the reconcile tab. So last time we talked about the different methods that we could use when we have the inventory noting that inventory kind of throws a wrench into the system. We talked about last time the idea that if we have a little bit of inventory we can try to stay in a cash based system which will allow us to continue with our strategy of attempting to create our financial statements directly from the bank account data. But now let's think about a perpetual inventory system and a periodic inventory system. So first we'll do a periodic inventory system. So I'm going to go down. Imagine that we are paying for inventory again. So I'm going to pick pick one of these items down here. All right. So we'll pick this one here. Now note last time we simply recorded it to cost of goods sold. So now what the system is doing what zero is doing is memorize this transaction. It pulled it up from the memorized transaction. We didn't make a rule for this one but we have clicked down here that we want to suggest the previous entries. If I uncheck that then we don't see that blue box there anymore. Now note you might actually want to turn that blue box off because that will make it easier for you to make sure that you are actually setting up the rules to be exactly what you want. Right. Because that's going to make it less likely that you make a problem. So I've unchecked that box and now we don't see anything here. All right. And so then I'm going to hit the details dropdown and let's imagine we have a periodic inventory system and we're purchasing the inventory. So I'm not going to track the item again. The item represents us tracking inventory within the system which would track not only the dollar amount going to the inventory but also the units creating another sub ledger. That creates more complication to track within the system. So this time we're going to say I'm just going to record it as an account here. But instead of recording it to cost of goods sold and expensing it I'm going to put it on the books as an asset and then I will track the inventory in a physical unit method but not use the items within zero to do that instead doing it in Excel which gives me more flexibility to track it in Excel for example and then just simply do periodic adjustments into the system. So I'm going to put it into an inventory account. We don't have an inventory account. So I'm going to make an account like one three zero zero let's do. So add an account. I'm trying to think of the account number one three zero zero. Let's say it's going to be a type of account which is going to be a current asset. So we'll pick that up our current asset type of account name. I'm going to call it inventory. I'm going to call it inventory like one this time because we might want to when we do the perpetual inventory method. I'll track it in another account so we can see how the sub ledger works possibly so we'll say inventory one description that looks good. Alright so if I record this what's it what's it going to do it's going to increase the asset account of inventory instead of cost of goods sold and of course decrease the checking account but we won't have a sub ledger tracking the units of inventory imagining the units of inventory being tracked outside of the system. Alright we'll save the transaction and then let's go ahead and match the transaction. So we are imagining the purchase of inventory balance sheet account updating it. We've got the inventory is now on the books as an asset here. Now remember this is it seems obvious but it sometimes it's easy to kind of forget that clearly the balance sheet is being reported in dollars. Obviously the inventory itself is in units so if we have five units five widgets of inventory they have like a $10 cost right so we have so we so we have to have that conversion thing of converting the units to dollars. Now that becomes kind of an issue especially when we're buying the same units of inventory over time as we have inflation typically and the unit cost goes up right because then when we sell the inventory. We're faced with the problem of which inventory unit did I sell which is the proper cost to apply to it. That's when we have to deal with that flow assumptions like a first in first out or weighted average which again you might do externally in like an Excel worksheet or something like that. Now the other side of course decreased the checking account. There's no impact this time on the profit and loss or income statement. We didn't record the expense of cost of goods sold. When would we were we record the expense of cost of goods sold when we sell the inventory. Now note if you're using this method then the next things that will happen with regards to that inventory. You're going to sell it at some time in the future right when you sell the inventory you could do it. Using an invoice form or a spend money form. If you're using the actual bank feeds to record the sales side of the transaction you will receive the money and the bank feeds over here right and then when we get the money in the bank feeds we could record simply that as revenue. We could just record it as revenue when we get the money. So if you do that then when you get the money and record the revenue you're going to record just revenue and not cost of goods sold. We're just going to see an increase in revenue on the income statement. When are we going to record the cost of goods sold. We will do it on a periodic inventory method meaning if I go back to the balance sheet over here. What I would do under this method is continue to record every time I purchase inventory to an increase to this inventory account in dollars. I'm not tracking it this units within zero but I am tracking the units outside of zero in Excel. So for example whenever I purchase something in Excel I'm tracking the unit increase and I can do my cost of goods sold calculation in Excel. I can take a physical count of the inventory and then take my beginning inventory plus my purchases physical units minus the ending inventory that I get from a physical count and that will tell me how many units of inventory I sold and then based on that and based on a flow assumption first and first out LIFO or weighted average. I can determine the decrease in the inventory over that time period and then I'll just do a journal entry in zero decreasing inventory and recording the related cost to goods sold possibly on a nightly basis possibly on a weekly basis possibly on a monthly or even yearly basis depending on the method I'm using to track inventory outside of the system. So that's a perpetual inventory method that you could use. I'm sorry that's a periodic inventory method because we're just in it periodically at the end of night night week month or year and so then your next method is the perpetual method the full surface method. All right so if we're doing a perpetual inventory system now we want to have our inventory account go up but also have a sub ledger tracking the inventory account when it goes up. Now normally if I go to my flow chart in a perpetual inventory system this is a QuickBooks desktop flow chart but I'm just using it to show the accounting flow which is the same for most accounting cycles. On a perpetual inventory system when we buy the inventory we might buy it with just like a check form or a decrease of money out type of form but we would be tracking items we have to set up items in order to track it or we might do more of a full service system or a process of requesting the inventory which a purchase order and then receiving it with a bill recording it and then. Once we have received it. Then we pay the bill right so we could have it depends on what kind of process we have to request our inventory. So if you're using basically the bank feeds to try to fit the bank feeds in. Most clearly here or most directly then we might just say it's a money out form we purchased the inventory with an electronic transfer and try to enter it in that way but also see if we can add the items so that we can track the inventory in the system. Or if you were having a method where you request the inventory you would have a purchase order that would be a deviation from a cash based kind of system it would make more work than trying to create your books from just the bank feeds because the purchase order is a request of inventory. There's no cash actually happening there's actually no impact on the financial statements and you would only use a purchase order if you have sufficient amount of leverage. In your business dealings with your with your supplier to request the inventory to be shipped to you before you pay for it and then when you get the inventory it would then have a bill in it and you can enter the bill or pay the bill at that point in time. And then of course once we record the inventory on the books we're going to sell the inventory normally that would happen with an invoice or sales receipt form. But if you're trying to make it all automated in the bank feeds you could imagine a system where you wait till it clears the bank and try and try to record revenue with it with a deposit form right. But the problem is when you record the sales side of the transaction you also want to be tracking the the units that are sold rights which means you have to track the items in the system if you're tracking that on a perpetual system within zero. All right so if I go to the first tab just note that if I hit the drop down when we purchase inventory you might first use a purchase order and then I enter a bill from the purchase order or you might just pay for the inventory. You know at the point in time that you are that you're purchasing the inventory like you kind of would if you're an individual buying something from like Amazon or something in which case you might use the bank feeds for something to clear. So we're going to say all right let's pretend that is the case but we're going to need an item so we want to put our inventory items in place to track. So the items you can find by going to the business drop down and go into the products and services. So I'm going to go into the products and services and I'm going to set up a service item the things that are usually populated when I make an invoice or something like that the things I'm selling the things I want to be tracking on a unit basis as well as a cash basis. Let's add a new item and I'm just going to say this is going to be it's our inventory let's say inventory item one just generic name in it that's going to be the name of it and the purchase. When I purchased them I'm going to say that let's keep let's keep see if I can keep it blank so I can purchase it enter the item when it comes through on the bank feeds if it allows me to do that I'm going to say the purchase account is going to be going to. I'm going to see I'm going to keep the same inventory account I was going to create two but let's just put it to that same inventory one account and then the sales price let's say we sell them for like $500 let's just make up a number here sales account to the sales account notice I have two sales accounts this one is usually sales often refers to selling of inventory items versus service items which have no inventory. And then if there's taxes involved in with the sale like a sales tax or usage tax then you can set up your taxes as well and that also the taxes also muddy up the ability to be able to make sales by waiting until something kind of clears the bank because because the taxes themselves is going to be an accrual type of thing you're going to have to put something on the books as a liability we might talk about that a little bit more later but let's go ahead. And save that so now we have our item so now let's go into our banking again account or accounting drop down bank accounts and let's go into the drop down here and go into account transactions and I'm going to go into the reconcile item I'm going to look for a transaction on 1017 next. 1017 I had a transaction I wanted to look for so here's the one so I'm going to say that this this was for the purchase of inventory so let's go ahead and add the details on this one. And I'm going to say this is Primarica 01 again so it's going to go to Primarica. Let's just say to Primarica. All right I already have this one in there let's keep that and then the reference is good. Now it gives me the ability to add an item here. So I'm going to say OK let's see if I can add an item there's item one and notice it's removing the dollar amount. I tried to not put a dollar amount in the item so that it would keep the dollar amount here that we're that we have on the side but it's not doing that because it's going to use zero as the item. So I can still say OK let's just say the unit the unit price was 30 and that's going to bring it back up to the 30 amount here so that looks good. Before I do this let me just change that item back so I'm going to I'm going to go back to the item again business drop down. Hold on a second business drop down I'm going to go back to products and services. I'm not going to record this one and I'm going to put that $30 as the cost. So I'm going to go into this item and let's say that we want to edit the item and let's put that cost of $30 so it makes sure that it tracks the $30 cost. So there it is. OK so I'm just adding the $30 cost now let's go back into the accounting. Let's go back into the bank accounts. Let's go into the manage account account transactions and reconcile and then back to that transaction. All right let's do this again. So we're in here I'm going to say that I'm going to add the details for this $30 transaction and OK. And then I'm going to add the item. And so now when I select the item there it is it's pulling in that $30. Now if you were to do it this way you'd have to make sure that whatever the item whatever you purchased down here you would have to actually fill in the items that match the total dollar amount of the $30. So still this would be still kind of logistically difficult because most likely what what what you would want to do is is go up top and enter you know the purchase order and then the spend money form and use the bank. Reconciliations to reconcile the transaction but it is I just want to show that it is possible to do it to run it this way. So because you can add because it has the item field which again is a little bit different than some other softwares. I'm not sure if that capacity is in like I could like the QuickBooks online so it's kind of interesting and I kind of kind of like that they have at least the ability to do that in here. So what are we going to do when this happens. It's going to record the inventory is going to go up by 30 just like before and we're going to record a decrease to the checking account but also we have another account that will be created which will track the units of items that we're purchasing as well. So let's go ahead and save it just to check that out. And so save the transactions. And once a tax field I'm going to say tax exempt again taxes would throw kind of an issue into this as well. I don't want to get into that right now but I'll say go ahead and save it. All right. So we're going to go up and say now I'm going to match it out. So we'll say match it out and then so it's been reconciled if I go to the balance sheet and check it out. We have our inventory account now has $80 in it. That first transaction was not being tracked perpetually the second one was. So now we have the $30 being tracked perpetually and nothing's happening to the income statement because we haven't sold it yet. This is a prior $30 from a prior transaction. That's not the same thing. Right click on the tab up top. Let's duplicate it because now we should have another form that's actually tracking the inventory perpetually within the system. So we'll go to the accounting dropdown and reports and then let's type in up top. I'm going to say hide this. This isn't the report I wanted. This is not the reports you're looking for reports. This is going to go to inventory item list inventory item list and this then is now tracking the inventory internally. Now we only have one item the cost of $300 of $30 for it because and that normally would match what's on the balance sheet here. But remember we posted something else that first transaction that wasn't tracked internally. So this is the added report which is now tracking the units of inventory and it'll apply a flow assumption for us and everything. But it takes a little bit more work for us to populate. Now the next thing that would happen in this process if I go to the first tab is that we would have revenue that would be generated. Again normally if you have revenue generated generated you would have an invoice form or you would have a receive money form. So for example if I made an invoice form and we had like customer customer one generic customer one then down here you would have your item that would be sold. Now the item is now matching the this is the item that is now pulling in from the amount that we populated into the system for for the items and it's now pulling in the unit price. So if I recorded an invoice then what would it do it would increase accounts receivable which is a noncruel account something's going to be difficult to deal with with the bank fees but we'll talk more about that later. The other side would go to sales of 500 and on a perpetual inventory system the cost of goods sold would be recorded as well as the the decrease in the inventory. And if you had taxes involved it would also be applying the taxes over here as well. So you can also imagine being on a perpetual inventory system like I can imagine I mean sorry using the bank feeds I can imagine going into the bank accounts over here and saying that if I go into my bank account that that I'm going to see the deposits and I go into my reconcile I'm going to see the deposits that are going to clear the the the bank. So let's say this was a let's say this was a deposit from an invoice or a sale of inventory. They do give you the ability to add the inventory item on the sales side here. But again it would be difficult usually to do that if you get a deposit that's coming through then you're probably not going to track the inventory. Usually if you're selling inventory you're going to have to make an invoice or a spend or a receive money form and then match over here. So let's just show that for now if I hit the drop down again let's just make that invoice again. If I make the invoice again and say this is customer one customer one boom and this is going to happen in 2022. Let's say so I'm somewhere in 2022 will say April or whatever of 2022. Actually it's got to be the end of 2022 doesn't it because we had it sometime in like December. Okay and then my item is going to be that inventory item. All right so let's go ahead and record this. So I'd say approve invoice field explain I need a date here due date is going to be let's say December 31st. All right approve. So now we can have some revenue on our income statement that'll be good. So if I go to my balance sheet and update that now we're tracking accounts receivable which is which is a non cash kind of concept. So that that pulls us away from just being able to construct our books on a cash basis. We'll talk about deposits more later if I go to the income statement and update it. Now we've got the sales which is recorded at that 500 and the cost of goods sold. Now note cost of goods sold did not change because I didn't turn on the tracking of the inventory. So let me just show you what I mean. I kind of messed it up here. I'm going to go back to the first tab and let's go to our business dropdown and if you go into your products and services and then go into this item here. I'm going to edit the item. So I turned everything on by didn't turn on the track inventory item which is the perpetual tick mark you have to tick off so that it will track the inventory perpetually. So if you save that it will not recreate everything retroactively. So if I wanted to do this again I'd have to go back in here and say OK I'm going to go in here and basically delete the transaction of the purchase of the inventory. And then I'll record it again. So if I go back in and say all right this transaction right here I want to remove it. So I'm going to edit remove and redo. So I'm going to remove it there. So there we have it. Then let's go back into let's see if that takes it out of the reconciled items accounting drop down bank reconciliation. And I'm going to go back into the manage transactions. I'm going to look for that transaction in the reconcile item again. And I believe we brought it back here on the 1017. So I'm going to record it again adding the details. And so I'm going to say that this is going to be primary item. So now I'm going to add the item. And it's now going to the inventory asset account that has been set up when I when I told it to set up on a perpetual inventory. So we have two inventory asset accounts. Let's record it again saving the transaction and save the transaction and then see if we can match it. It wants something in the tax rate field. So I'm going to say all right zero save it. And then we will match it. Okay. So that should record it again over here. So if I go back to my balance sheet and my income balance sheet I messed up my balance sheet. I'm going to go drop down go into my balance sheet. And we have updated it in here for two thousand twenty two. Okay. And then so now we have this separate account for the inventory asset. It's just tracking that thirty dollars. If I tab to the right on the income statement were updated here. If I tab to the right again this is now my inventory tracking. And now I've now I have the one inventory account of the thirty dollars which is tying out to the balance sheet account of thirty dollars because this is the one we're tracking perpetually. Now I'm going to delete the accounts receivable and rerecord that to show us the sale of that item. So I'm going to go into that one and go into customer one and I'm going to just see if I can delete this one. We will edit it. Let's see if I can just edit it maybe and see if I can change it to inventory one and see if that updates it. So it is recommended to add the original content details. Let's see if that will just simply update it so it'll track the sale of the inventory. And then I'm going to go back to the accounting drop down and the income statement. And let's see if I can bring this back to two thousand twenty two and two thousand twenty two and update. So there's the five hundred but no it's not going to update. It's not going to update over here to here so I'd have to delete or avoid it. All right let's go into it again and go into it here and say I'm going to avoid it. OK make another one invoice and then this will be customer one customer one sometime in two thousand twenty two. The end of two thousand twenty two. We sold this item which will bring the units of item back down to zero. All right let's approve it again. The due date field needs to be in play. All right all right for crying out loud. OK so then when we sell it if I go back to the income statement. We now have the five hundred dollars but we have sixty dollars in the cost of good soul. That's what I was trying to get to because now it reduced with that sales item the inventory. I count back down and recorded the other thirty dollars here on the balance sheet. If I can open the balance sheet again. Sorry about the mess of an issue I put together without checking that off but we will get there. So we're going to say the balance sheet now has the inventory account you know went back down to zero for that thirty dollars. And then if I look at my account over here now the perpetual inventory account has gone back down to zero. OK let's take a quick look at the trial balance accounting drop down and reports opening up the trial balance type in and trial balance to do so. And you can just see how the balance sheet and the income statement are piled on top of each other in the trial balance.