:code-column:
=================================
Inventory valuation configuration
=================================
Inventory valuation refers to how you value your stock. It’s a very
important aspect of a business as the inventory can be the biggest asset
of a company.
Inventory valuation implies two main choices:
- The cost method you use to value your goods (standard, fifo, avco)
- The way you record this value into your accounting books (manually or automatically)
Those two concepts are explained in the sections below.
Costing Methods: Standard, FIFO, AVCO
=====================================
The costing method is defined in the product category. There are three
options available. Each of them is explained in detail below.
.. rst-class:: alternatives doc-aside
Standard Price
.. rst-class:: values-table
.. list-table::
:widths: 28 18 18 18 18
:header-rows: 1
:stub-columns: 1
* - Operation
- Unit Cost
- Qty On Hand
- Delta Value
- Inventory Value
* -
- €10
- 0
-
- €0
* - Receive 8 Products at €10
- €10
- 8
- +8*€10
- €80
* - Receive 4 Products at €16
- €10
- 12
- +4*€10
- €120
* - Deliver 10 Products
- €10
- 2
- | -10*€10
|
- €20
* - Receive 2 Products at €9
- €10
- 4
- +2*€10
- €40
**Standard Price** means you estimate the cost price based
on direct materials, direct labor and manufacturing overhead
at the end of a specific period (usually once a year). You
enter this cost price in the product form.
Average Price
.. rst-class:: values-table
.. list-table::
:widths: 28 18 18 18 18
:header-rows: 1
:stub-columns: 1
* - Operation
- Unit Cost
- Qty On Hand
- Delta Value
- Inventory Value
* -
- €0
- 0
-
- €0
* - Receive 8 Products at €10
- €10
- 8
- +8*€10
- €80
* - Receive 4 Products at €16
- €12
- 12
- +4*€16
- €144
* - Deliver 10 Products
- €12
- 2
- | -10*€12
|
- €24
* - Receive 2 Products at €6
- €9
- 4
- +2*€6
- €36
The **Average Price** method recomputes the cost price as a receipt order
has been processed, based on prices defined in tied purchase orders:
FORMULA (see here attached)
The average cost does not change when products leave the warehouse.
From an accounting point of view, this method is mainly justified in
case of huge purchase price variations and is quite unusual due to its
operational complexity. Your actually need a software like Odoo to
easily keep this cost up-to-date.
This method is dedicated to advanced users. It requires well established
business processes because the order in which you process receipt orders
matters in the cost computation.
FIFO
.. rst-class:: values-table
.. list-table::
:widths: 28 18 18 18 18
:header-rows: 1
:stub-columns: 1
* - Operation
- Unit Cost
- Qty On Hand
- Delta Value
- Inventory Value
* -
- €0
- 0
-
- €0
* - Receive 8 Products at €10
- €10
- 8
- +8*€10
- €80
* - Receive 4 Products at €16
- €12
- 12
- +4*€16
- €144
* - Deliver 10 Products
- €16
- 2
- | -8*€10
| -2*€16
- €32
* - Receive 2 Products at €6
- €11
- 4
- +2*€6
- €44
For **Real Price** (FIFO, LIFO, FEFO, etc), the costing is further
refined by the removal strategy set on the warehouse location
or product's internal category. The default strategy is FIFO. With
such method, your inventory value is computed from the real cost
of your stored products (cfr. Quantitative Valuation) and not from
the cost price shown in the product form. Whenever you ship items,
the cost price is reset to the cost of the last item(s) shipped.
This cost price is used to value any product not received from a
purchase order (e.g. inventory adjustments).
FIFO is advised if you manage all your workflow into Odoo (Sales,
Purchases, Inventory). It suits any kind of users.
Standard Price
--------------
In Standard Price, any product will be valued at a cost that you defined
manually on the product form. Usually, this cost is an estimation based
on the material and labor needed to obtain the product. This cost must
be reviewed periodically.
First In First Out (FIFO)
-------------------------
In FIFO, the products are valued at their purchase cost. When a product
leaves the stock, that’s the “First in, first out” rule that applies.
Let’s take an example: I first purchase a t-shirt for $10 and, later,
one for $20. The first t-shirt that will go out of my stock will be
valued at $10 and the next one at $20.
.. tip::
Pay attention, that this is a financial FIFO. This means that the
locations where the products are stored don’t impact the valuation. The
first value “in” is the first value “out”, no matter the storage
location.
Average Cost (AVCO)
-------------------
In AVCO, each product has the same value and this value is the average
purchase cost of the product. Let’s take an example: I first purchase a
t-shirt for $10 and, later, one for $20. Each t-shirt will be valued at
$15, the average weighted purchase cost. With this costing method, the
cost of the product is recomputed as each receipt.
Inventory Valuation: Manual or Automated
========================================
There are two ways to record your inventory valuation in your accounting
books. As the costing method, this is defined in your product category.
Those two methods are detailed below.
Manual Inventory Valuation
--------------------------
In this case, goods receipts and deliveries won’t have any direct impact
on your accounting books. Periodically, you create a manual journal
entry representing the value of what you have in stock. To know that
value, go in Inventory > Reporting > Inventory Valuation.
+----------------------------------+---------+----------+
| | Debit | Credit |
+==================================+=========+==========+
| Assets: Inventory | X | |
+----------------------------------+---------+----------+
| Expenses: Inventory Variations | | X |
+----------------------------------+---------+----------+
.. tip::
If the stock value has decreased, the assets account will be credited.
Continental Accounting
~~~~~~~~~~~~~~~~~~~~~~
In a periodic inventory valuation, goods reception and
outgoing shipments have no direct impact in the accounting.
At the end of the month or year, the accountant posts one
journal entry representing the value of the physical inventory.
This is the default configuration in Odoo and it works
out-of-the-box. Check following operations and find out how
Odoo is managing the accounting postings.
.. rst-class:: alternatives doc-aside
Vendor Bill
.. rst-class:: values-table
============================= ===== ======
\ Debit Credit
============================= ===== ======
Assets: Inventory 50
Assets: Deferred Tax Assets 4.68
Liabilities: Accounts Payable 54.68
============================= ===== ======
Configuration:
* Purchased Goods: defined on the product or on the internal category of related product (Expense Account field)
* Deferred Tax Assets: defined on the tax used on the purchase order line
* Accounts Payable: defined on the vendor related to the bill
Goods Receptions
No Journal Entry
Customer Invoice
.. rst-class:: values-table
===================================== ===== ======
\ Debit Credit
===================================== ===== ======
Revenues: Sold Goods 100
Liabilities: Deferred Tax Liabilities 9
Assets: Accounts Receivable 109
===================================== ===== ======
Configuration:
* Revenues: defined on the product or on the internal category of related product (Income Account field)
* Deferred Tax Liabilities: defined on the tax used on the invoice line
* Accounts Receivable: defined on the customer (Receivable Account)
The fiscal position used on the invoice may have a rule that replaces the
Income Account or the tax defined on the product by another one.
Customer Shipping
No Journal Entry
Manufacturing Orders
No Journal Entry
.. raw:: html
At the end of the month/year, your company does a physical inventory
or just relies on the inventory in Odoo to value the stock into your books.
Create a journal entry to move the stock variation value from your
Profit&Loss section to your assets.
.. h:div:: doc-aside
.. rst-class:: values-table
===================================== ===== ======
\ Debit Credit
===================================== ===== ======
Assets: Inventory X
Expenses: Inventory Variations X
===================================== ===== ======
If the stock value decreased, the **Inventory** account is credited
and te **Inventory Variations** debited.
.. raw:: html
Anglo-Saxon Accounting
~~~~~~~~~~~~~~~~~~~~~~
.. rst-class:: alternatives doc-aside
Vendor Bill
.. rst-class:: values-table
============================= ===== ======
\ Debit Credit
============================= ===== ======
Assets: Inventory 50
Assets: Deferred Tax Assets 4.68
Liabilities: Accounts Payable 54.68
============================= ===== ======
Configuration:
* Purchased Goods: defined on the product or on the internal category of related product
(Expense Account field)
* Deferred Tax Assets: defined on the tax used on the purchase order line
* Accounts Payable: defined on the vendor related to the bill
Goods Receptions
No Journal Entry
Customer Invoice
.. rst-class:: values-table
===================================== ===== ======
\ Debit Credit
===================================== ===== ======
Revenues: Sold Goods 100
Liabilities: Deferred Tax Liabilities 9
Assets: Accounts Receivable 109
===================================== ===== ======
Configuration:
* Revenues: defined on the product or on the internal category of related
product (Income Account field)
* Deferred Tax Liabilities: defined on the tax used on the invoice line
* Accounts Receivable: defined on the customer (Receivable Account)
The fiscal position used on the invoice may have a rule that replaces the
Income Account or the tax defined on the product by another one.
Customer Shipping
No Journal Entry
Manufacturing Orders
No Journal Entry
.. raw:: html
Automated Inventory Valuation
-----------------------------
In that case, when a product enters or leaves your stock, an accounting
entry will be automatically created. This means your accounting books
are always up-to-date. This mode is dedicated to expert accountants and
advanced users only. As opposed to periodic valuation, it requires some
extra configuration & testing.
First, you need to define the accounts that will be used for those
accounting entries. This is done on the product category.
.. image:: media/inventory_valuation_config_02.png
:align: center
Note that the accounting entries that will be recorded will depend on
your accounting mode: it can be continental or anglo-saxon. In
continental accounting, the cost of a good is taken into account as soon
as the product is received in stock. In anglo-saxon accounting, the cost
of a good is only recorded as an expense when this good is invoiced to a
final customer.
Usually, based on your country, the correct accounting mode will be
chosen by default. If you want to verify your accounting mode, activate
the developer mode and open your accounting settings.
Continental Accounting
~~~~~~~~~~~~~~~~~~~~~~
.. h:div:: valuation-chart-continental doc-aside
.. placeholder
.. raw:: html
.. h:div:: doc-aside
**Configuration:**
- Accounts Receivable/Payable: defined on the partner (Accounting tab)
- Deferred Tax Assets/Liabilities: defined on the tax used on the invoice line
- Revenues/Expenses: defined by default on product's internal category; can be
also set in product form (Accounting tab) as a replacement value.
- Inventory Variations: to set as Stock Input/Output Account in product's internal
category
- Inventory: to set as Stock Valuation Account in product's internal category
Anglo-Saxon Accounting
~~~~~~~~~~~~~~~~~~~~~~
.. h:div:: valuation-chart-anglo-saxon doc-aside
.. placeholder
.. raw:: html
.. h:div:: doc-aside
**Configuration:**
- Accounts Receivable/Payable: defined on the partner (Accounting tab)
- Deferred Tax Assets/Liabilities: defined on the tax used on the
invoice line
- Revenues: defined on the product category as a default, or specifically
to a specific product.
- Expenses: this is where you should set the "Cost of Goods Sold" account.
Defined on the product category as a default value, or specifically on
the product form.
- Goods Received Not Purchased: to set as Stock Input Account in product's
internal category
- Goods Issued Not Invoiced: to set as Stock Output Account in product's
internal category
- Inventory: to set as Stock Valuation Account in product's internal category
- Price Difference: to set in product's internal category or in product
form as a specific replacement value