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Invoice - What is an invoice?

Definition: a document sent to a buyer that specifies the amount and cost of products or services that have been provided by a seller.

An invoice indicates what must be paid by the buyer according to the payment terms of the seller. Payment terms usually specify the period of time that a buyer has to send payment to the seller for the goods and/or services that they have purchased.

Included in a typical invoice

Usually, an invoice will include an arrangement of the following points of information:
 

·         The word ‘Invoice’ ·         A unique reference number for reference ·         The date the product was sent or delivered (or the date the service was rendered) ·         The date the invoice was sent ·         The contact information and name of the seller ·         The name of the buyer

·         The contact information of the buyer ·         The terms of payment (that explain the means of payment, when the sum should be received, the discount details for early payment, late payment fees, etc.) ·         An account detailing the product/service ·         The cost per unit of the product (if this applies) ·         The total amount that is owed

Sales v. purchase invoice

An invoice shows the payment that a buyer owes to a seller. From a seller’s point of view, an invoice for the sale of goods and/or services is referred to as asales invoice.

From a buyer’s point of view, an invoice for the cost of goods and/or services rendered is referred to as a purchase invoice.

What is accounting?

Accounting is the recording of financial transactions plus storing, sorting, retrieving, summarizing, and presenting the information in various reports and analyses. Accounting is also a profession consisting of individuals having the formal education to carry out these tasks.

One part of accounting focuses on presenting the information in the form of general-purpose financial statements(balance sheet, income statement, etc.) to people outside of the company. These external reports must be prepared in accordance with generally accepted accounting principles often referred to as GAAP or US GAAP. This part of accounting is referred to as financial accounting.

Accounting also entails providing a company's management with the information it needs to keep the business financially healthy. These analyses and reports are not distributed outside of the company. Some of the information will originate from the recorded transactions but some of the information will be estimates and projections based on various assumptions. Three examples of internal analyses and reports are budgets, standards for controlling operations, and estimating selling prices for quoting new jobs. This area of accounting is known as management accounting.

Another part of accounting involves compliance with government regulations pertaining to income tax reporting.

Today much of the recording, storing, and sorting aspects of accounting have been automated as a result of the advances in computer technology.

What is Accounting?

Accounting is an information science used to collect, classify, and manipulate financial data for organizations and individuals.

Accounting is instrumental within organizations as a means of determining financial stability. Accountants are responsible for determining an organization’s overall wealth, profitability, and liquidity. Without accounting, organizations would have no basis or foundation upon which daily and long-term decisions could be made. The budgets for marketing activities, profit reinvestment, research and development, and company growth all stem from the work of accountants. Accounting is one of the oldest and most respected professions in the world, and accountants can be found in every industry from entertainment to medicine.  

merchandise inventory

The current asset which reports the cost of a retailer's, wholesaler's, or distributor's goods purchased to be resold, which have not yet been sold as of the balance sheet date.

Merchandise Inventory

Merchandise inventory is goods that a company purchases and plans to resell to customers at a higher price. Typically, retailers and wholesalers are the only businesses with merchandise inventory. Manufacturers produce inventory, but they don’t purchase it and resell it. Thus, a manufacturer’s inventory isn’t considered merchandise inventory.

Retailers, wholesalers, and distributors buy goods from manufacturers and actively market or merchandise the goods to customers. The distinction between a retailer’s customer and a manufacturer’s customer is that a retail customer is the end user of the product.

Retailers record their inventory on the balance sheet as a current asset and usually listed belowcash and accounts receivable.

Here’s an example of the typical merchandiser’s operating cycle and the journal entries required.

Example

When a retailer purchases inventory from a manufacturer, it is recorded as an asset by debiting the inventory account and crediting cash or accounts payable. Notice that inventory is not expensed until it is actually sold. Here is the entry to record a bulk inventory purchase by a retailer early in the year.

Later, when the retailer sells $100 of that merchandise inventory to a customer for $500, the cash account is debited and the revenues account is credited for the same about. The inventory account is credited for the amount the retailer paid for the inventory and the cost of goods sold account is debited for the same amount.

Basically, all merchandise is capitalized when it is purchased and recorded on the balance sheet as a current asset. When it’s later sold to a customer, the inventory is transferred from the asset account to an expense account. You can think of the merchandise inventory account as a holding account for inventory that is waiting to be sold.

Accounts Receivable - AR

DEFINITION of 'Accounts Receivable - AR'

Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.

On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts

Accounts Receivable

Definition: Accounts receivable is short-term amounts due from buyers to a seller who have purchased goods or services from the seller on credit. Accounts receivable is listed as a current asset on the seller's balance sheet.

The total amount of accounts receivable allowed to an individual customer is typically limited by a credit limit, which is set by the seller's credit department, based on the finances of the buyer and its past payment history with the seller. Credit limits may be reduced during difficult financial conditions when the seller cannot afford to incur excessive bad debt losses.

Accounts receivable are commonly paired with the allowance for doubtful accounts (a contra account), in which is stored a reserve for bad debts. The combined balances in the accounts receivable and allowance accounts represent the net carrying value of accounts receivable.

The seller may use its accounts receivable as collateral for a loan, or sell them off to a factor in exchange for immediate cash.

Accounts receivable may be further subdivided into trade receivables and non trade receivables, where trade receivables are from a company's normal business partners, and non trade receivables are all other receivables, such as amounts due from employees.

Similar Terms

Accounts receivable are also known as receivables.

The first-in, first-out (FIFO) method is a widely used inventory valuation method that assumes that the goods are sold (by merchandising companies) or materials are issued to production department (by manufacturing companies) in the order in which they are purchased. In other words, the costs to acquire merchandise or materials are charged against revenues in the order in which they are incurred.

Under first-in, first-out method, the ending balance of inventory represents the most recent costs incurred to purchase merchandise or materials.

The use of FIFO method is very common to compute cost of goods sold and the ending balance of inventory under both perpetual and periodic inventory systems. The example given below explains the use of FIFO method in a perpetual inventory system. If you want to understand its use in a periodic inventory system, read “first-in, first-out (FIFO) method in periodic inventory system” article.

Example:

The Fine Electronics company uses perpetual inventory system to account for acquisition and sale of inventory and first-in, first-out (FIFO) method to compute cost of goods sold and for the valuation of ending inventory. The company has made the following purchases and sales during the month of January 2012.

Jan. 1	Inventory at the beginning of the month: 24 units @ $1,000 per unit.
Jan. 4	Sales: 16 units.
Jan. 7	Purchases: 12 units @ $1,020 per unit.
Jan. 10	Purchases: 10 units @ $1,050 per unit.
Jan. 14	Sales: 16 units.
Jan. 23	Sales: 12 units.
Jan. 24	Purchases: 12 units @ $1,060 per unit.
Jan. 27	Purchases: 4 units @ $1,080 per unit.
Jan. 29	Sales: 6 units.

All sales have been made @ $1600 per unit.

Required:

1. Prepare journal entries to record the above transactions under perpetual inventory system.
2. Prepare a FIFO perpetual inventory card.
3. Compute the cost of goods sold and the cost of inventory in hand at the end of the month of January 2012.

Solution:

(1). Journal entries:

January 4:
The Fine electronics company has sold 16 units for $25,600 (16 units × $1,600) on 4 January. On this date, 24 units in the beginning inventory are the only units available for sale. The cost of goods sold is, therefore, $16,000 (16 × $1,000). In a perpetual inventory system, two journal entries are made for the sale of inventory – one to update inventory account and one to record sale. These are given below:

Date	Description	Debit	Credit
Jan. 04	Accounts receivable	25,600
	Sales		25,600
	(16 units sold @ $1,600 each)
	————————————————-
	Cost of goods sold	16,000
	Inventory		16,000
	(Cost of 16 units sold)

January 7:The following entry would be made to record the purchase of 12 units @ $1,020 per unit on 7 January:

Date	Description	Debit	Credit
Jan. 07	Inventory	12,240
	Accounts payable		12,240
	(12 units purchased @ $1,020 each)

January 10:
The following entry would be made to record the purchase of 10 units @ $1,060 per unit on 10 January:

Date	Description	Debit	Credit
Jan. 10	Inventory	10,600
	Accounts payable		10,600
	(10 units purchased @ $1,030 each)

January 14:According to FIFO assumption, first costs incurred are first costs expensed, the cost of 16 units sold on 14 January would, therefore, be computed as follows:

Cost of 8 units:	8 units × $1,000	=	$8,000	(From beginning inventory)
Cost of 8 units:	8 units × $1,020	=	$8,160	(From units purchased on 7 January)
			———–
Total cost of 16 units sold on 14 January		=	$16160
			———–

The journal entries for the above sales would be made as follows:

Date	Description	Debit	Credit
Jan. 14	Accounts receivable	25,600
	Sales		25,600
	(16 units sold @ $1,600 each)
	————————————————-
	Cost of goods sold	16,160
	Inventory		16,160
	(Cost of 16 units sold)

January 23:
According to first-in, first-out (FIFO) method, the cost of 12 units sold on 23 January is computed below:

Cost of 8 units:	4 units × $1,020	=	$4,080	(From units purchased on 7 January)
Cost of 8 units:	8 units × $1,050	=	$8,400	(From units purchased on 10 January)
			———–
Total cost of 12 units sold on 23 January		=	$12,480
			———–

The journal entries for the above sales would be made as follows:

Date	Description	Debit	Credit
Jan. 23	Accounts receivable	19,200
	Sales		19,200
	(12 units sold @ $1,600 each)
	————————————————-
	Cost of goods sold	12,480
	Inventory		12,480
	(Cost of 12 units sold)

January 24:
On January 24, the following entry would be made to record the purchase of 12 units @ $1,060 per unit.

Date	Description	Debit	Credit
Jan. 10	Inventory	12,720
	Accounts payable		12,720
	(12 units purchased @ $1,060 each)

January 27:
On January 27, the following entry would be made to record the purchase of 4 units @ $1,080 per unit.

Date	Description	Debit	Credit
Jan. 27	Inventory	4,320
	Accounts payable		4,320
	(4 units purchased @ $1,080 each)

January 29:
According to first-in, first-out (FIFO) method, the cost of 6 units sold on 29 January is computed below:

Cost of 2 units:	2 units × $1,050	=	$2,100	(From units purchased on 10 January)
Cost of 4 units:	4 units × $1,060	=	$4,240	(From units purchased on 29 January)
			———–
Total cost of 6 units sold on 29 January		=	$6,380
			———–

The journal entries for the above sales would be made as follows:

Date	Description	Debit	Credit
Jan. 29	Accounts receivable	9,600
	Sales		9,600
	(12 units sold @ $1,600 each)
	————————————————-
	Cost of goods sold	6,380
	Inventory		6,380
	(Cost of 12 units sold)

(2). FIFO perpetual inventory card:

Companies using perpetual inventory system prepare an inventory card to continuously track the quantity and dollar amount of inventory purchased, sold and in hand. This card is known as perpetual inventory card. A separate perpetual inventory card is prepared for each inventory item. This card has separate columns to record purchases, sales and balance of inventory in both units and dollars. The quantity and dollar information in these columns are updated in real time i.e., after each purchase and each sale. At any point in time, the perpetual inventory card can, therefore, provide information about purchases, cost of sales and the balance in inventory to date.

The perpetual inventory card of Fine Electronics company is prepared below using FIFO method:

Date	Purchases	Sales	Balance
1st Jan.	Beginning balance		24 units × $1,000 = $24,000
04 Jan.		16 units × $1,000 = $16000	8 units × $1,000 = $8,000
07 Jan.	12 units × $1,020 = $12,240		8 units × $1,000 = $8,000 12 units × $1,020 = $12,240
10 Jan.	10 units × $1,050 = $10,500		8 units × $1,000 = $8,000 12 units × $1,020 = $12,240 10 units × $1,050 = $10,500
14 Jan.		8 units × $1,000 = $8,000 8 units × $1,020 = $8,160 $16,160	4 units × $1,020 = $4,080 10 units × $1,050 = $10,500
23 Jan.		4 units × $1,020 = $4,080 8 units × $1,050 = $8,400 $12,480	2 units × $1,050 = $2,100
24 Jan.	12 units × $1,060 = $12,720		2 units × $1,050 = $2,100 12 units × $1,060 = $12,720
27 Jan.	4 units × $1,080 = $4,320		2 units × $1,050 = $2,100 12 units × $1,060 = $12,720 4 units × $1,080 = $4,320
29 Jan.		2 units × $1,050 = $2,100 4 units × $1,060 = $4,240 $6,340	8 units × $1,060 = $8,480 4 units × $1,080 = $4,320
Total	$39,780	$50,980	$12,800

(3). Cost of goods sold (COGS) and ending inventory:

With the help of the above inventory card, we can easily compute the cost of goods sold and ending inventory.

a.	Cost of goods sold (COGS)	=	[$16,000 + $16,160 + $12,480 + $6,340]*
		=	$50,980
b.	Ending inventory	=	[$8,480 + $4,320]**
		=	$12,800