Unique inventory credit question

Hi there dhickson,

Making sure that your inventory on hold is tracked correctly is an important part of managing your books. QuickBooks Desktop is a great tool that can help you keep track of the value of your assets so that you know the value of your company. I can point you in the right direction.

Since this is a more particular case of you keeping the inventory that has already been purchased for future use and delivery, I recommend reaching out to your accountant for guidance in how to keep track of these materials. Their accounting knowledge and understanding of best business practices will be able to guide you on how to enter and track this in your books. If you were to want to find an accountant near you, you can locate one with QuickBooks experience on our Find an accountant website.

If you have any other questions, feel free to reach out here.

Hello @dhickson ,

I would like to clarify a couple of points you mentioned:

So for example, one builder has purchased 10 furnaces and 10 hot water tanks through us that they now have as stock.  How do I 'store' those credits or inventories and then use them when the time comes? What is the best method for that? How would I put a credit for 1 of those furnaces on their next invoice, etc. 

1.  If they now have as stock, does this mean that they have actually taken possession of the units and are storing them in their own warehouse?

2.  I'm not sure about How do I 'store' those credits or inventories and then use them when the time comes?  Have you already created an invoice and officially "sold" these items to the builder, or has the builder just given you an advance payment for the value of the units?

3.  How would I put a credit for 1 of those furnaces on their next invoice can be determined once we know the answer to questions 1 and 2.  If you can answer those, I can direct you along the correct path.

Hi @Rochelley  

Thank you for your response. I'll do my best to clarify your questions.

1. So what normally happens is we have a shop full of stock inventory and as we do the job for the builder we progress bill out the material we use from our stock inventory. Because of the supply shortage, and because we weren't able to financially carry a bulk "over-stock" of units, we asked the builders if they'd want to purchase a bulk amount of units up front that we would store for them and use on future jobs. 

2. I don't know the difference between how you phrased your question between the units being "sold" or "advanced payment for value of the units". (I'm very new to quickbooks and the office admin role so I apologize if that's a silly question). I can tell you that yes, we have invoiced them for their bulk supply of units that are being stored at our shop. 

3. Hopefully 1 and 2 are more clear.

Thank you so much for your help!!

Hi @dhickson ,

1.  All good there - I get what you're doing.

2.  Because you have collected money for the inventory but the inventory remains in your warehouse, ownership and liability can be in question.  Normally, a buyer isn't invoiced until he is deemed to have taken possession of the units, therefore the buyer assumes ownership and liability once the goods ship out of your warehouse. 

How did you invoice the buyer?  On the invoice did you use your inventory items for these units?  If so, then those items should be showing as removed from your inventory, on paper at least.  But because you are still in possession of the goods, you still legally own them.  You've heard the saying, "Possession is 9/10ths of the law?"  It is mostly true.

What should happen when someone wants to pre-pay you for inventory is you record the cash payment into an other current liability account which you are bound to hold in trust for that customer until either a.) the goods transfer from you to them and a sale is recognized, or b) the sale falls through and you return the cash to the customer.

The easiest way to do this in QB is to create an "other charge" type item called something like "Customer Deposits" and link it to an other current liability account of the same name.  Then you can create an invoice for your customer, but instead of invoicing them for the actual units, you would use the Customer Deposit item on the invoice, with a description of what is being pre-paid.  There should be no taxes added at this point.  It is a straight cash deposit.  When you receive the cash for the deposit, receive that cash payment against the Customer Deposit invoice you've made.  What QB will initially do is DR your A/R and CR the deposit liability account you've just made.  When you collect the money, QB will CR your A/R and DR your bank account.  This leaves you with a liability for the total amount the customer has pre-paid to you.

Each time the customer takes one or more of these units, you would create an invoice using the inventory items for the units being sold.  Add applicable taxes.  Once you've done this, create a final line to your invoice with the Customer Deposit item on it, and enter a negatve one (-1) qty for the total of the invoice, including taxes.  Now your sale is completed, items are removed from inventory, but your invoice is a $0.00 net value, as you have already collected the money.  What QBO will do with this transaction is CR Sales and DR Customer Deposits, DR COGS and CR Inventory (these last two are done behind the scenes).

Each time you make one of these sales invoices to the customer, the Customer Deposits account will be reduced until the pre-paid amount is used up.  If it turns out that you bill the customer for more charges than what the pre-payment is for, then there would be a balance owing to you on the final invoice.

The downside is you may have a hard time keeping those pre-paid units in stock . . . meaning because they are there, someone else in your company (depends completely on how large your company is) may think they are available and "sell" them to someone else.  So you would need to keep a good handle on the location and availability for that inventory for your pre-paid customer, possibly by putting a big "SOLD" sign on them.

This method follows the matching principle, meaning that you don't realize the sale until the goods are shipped from your facility, thus taxes are remitted and paid for that period, rather than a lump sum of taxes remitted when the pre-payment is made.  The customer should be doing exactly the same as you but opposite . . . they should be recording their prepayment into an asset account called "Vendor Deposits" and only realizing the purchase and inventory at the time they take possession.  Unfortunately, you can't control how they do their bookkeeping and you may have a difficult time explaining to them why the first invoice you make for the amount of the deposit doesn't have any taxes on it.  But as long as you do it correctly on your end, you will be golden.

Here is a good little piece on how to handle prepayments which may help you if I happen to have confused you at all!  :)

https://www.accountingtools.com/articles/how-to-account-for-prepayments.html

If you need any more clarification, I'm happy to help.  All the best!