When you process sales or purchase transactions, the system updates a customer control account or a supplier control account in the general ledger. To keep the general ledger in balance, the system needs to create a contra entry. The contra entry can happen in two ways, depending on whether you wish to integrate inventory into the general ledger:
No Inventory Integration - Sales transactions update an income statement sales account, and purchase transactions update an income statement purchases account.
Inventory Integration - The system maintains an inventory balance sheet account. This reflects the cost value of your inventory. The system creates additional general ledger transactions. For example, when you sell an item, the system moves the item's cost value from the inventory account to a cost of sales account. In some countries, the terminology for this method is "perpetual inventory".
You can use inventory groups for two purposes:
- To control inventory integration into the general ledger.
- To let you categorise your inventory into logical areas.
You must use inventory groups for integration, but you do not have to use them as categories.
An inventory group consists of a set of general ledger accounts. You link each inventory item to an inventory group. For integration purposes, you only need one inventory group. If you use the Setup Assistant to create a company, the system creates one or more inventory groups for you.
Inventory groups control the amount of detail you can see in the general ledger. For example, you can create one inventory group for all your inventory items. All inventory activity will update the same general ledger accounts. However, you may need to see some key inventory values separately in your general ledger. For example, if you pay royalties on sales of certain items, you may like to see them separately in the general ledger.
You achieve this by creating additional inventory groups, each of which contains its own set of general ledger accounts. This gives you the analysis you require. You also gain two additional benefits:
- You can see the financial implications of groups of inventory items in your business.
- You can use general ledger budgets to budget inventory activity and track performance of these groups.
Integration accounts do not have to be unique per inventory group - you can use the same account in one or more groups. You can therefore have many groups, all sharing the same sales account but using a different inventory account, or the other way around.
In fact, instead of analysing groupings of inventory in your general ledger, you may prefer to analyse them within your inventory system only. To do this, you also create additional inventory groups. However, you give each group the same integration accounts. This way, there is no inventory analysis in the general ledger. You then achieve your analysis by means of inventory reports, many of which you can run in inventory group sequence. These reports give you totals per inventory group.
Note that you can also use inventory categories for analysis, and they do not contain general ledger accounts.
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