This is partly a bookkeeping question (whether something is a direct expense or an overhead) and partly a Sage question.
Our small company has branched out into mail order. Is it OK to use the same nominal code (i.e. Sage 5100) for carriage outwards as we have already been using for carriage inwards?
I would like to set up a new separate code for carriage outwards, e.g. 5105 but the code wizard won't let me set up one in the 5000's.
I do want it to be in this range because it appears to me that the cost of sending goods sold by mail order is a direct expense - unlike the "overheads" postage and carriage cost 7501, which would be more suitable for postage costs of business admin letters, etc. There seems to have been some debate about that issue on this forum and others, however!
So, does using the same code for both matter? If it is a bad idea, can I bypass the Sage nominal codes wizard? And which is it, direct expense or overhead?
Hi again, I've solved the Sage part of my rather vague problem above.
(I did this by the traditional method: I tried random things with no success, then shouted at Sage REALLY LOUDLY - and it mysteriously started working. The Nominal Codes wizard suddenly would allow me to make a new code in the 5000's after all.)
That's good because I didn't like the idea of not being able to look at carriage outwards and carriage inwards separately and I am still pretty sure that the cost of delivering goods to the customer is not an overhead.
Still left with a little doubt as to whether it is a Purchase Charge or a Direct Expense.
It is normal convention to treat carriage inwards as a cost of sale (5100 sage code), this equalises differences where different suppliers include carriage in the cost of the purchase, where as another may show carriage seperately to the product.
Carriage out is normally treated as an administrative expense (7501), and not a cost of sale.
That's the convention but at the end of the day it will not affect the bottom line, and would only really affect some of the lesser used analytic ratios.
Bill
Edit: Just thought I would add a reason why carriage out is an admin expense and not a cost of sale. A cost of sale is normally attributed to the costs required to get a product ready for sale. Without them you have no product to sell.
Distribution costs, are classed as admin costs, and are part of the costs required to take the goods to market. It may not be possible to sell the goods with out delivering them but they are still in a saleable condition.
Can I feel a Shaun debate brewing ???
-- Edited by Wella on Friday 15th of July 2011 05:54:37 PM
Regarding the Great Secret of the craft, Nick, fear not: my lips are sealed. Tony, I am not sure I agree with this newfangled progressive approach. You'll be giving 'em votes, next!
Regarding my query, Nick, I now realise that I was misusing the term "carriage outwards". I was not referring to the carriage component of revenue, the sum that customers pay us for delivery. I was referring to the cost we pay to buy stamps and (on rare occasions) use other delivery services than the Royal Mail.
Tony, for most businesses, I would agree. But it seems to me that for a mail order business which sends out the products individually to customers, your definition
"A cost of sale is normally attributed to the costs required to get a product ready for sale. Without them you have no product to sell."
- actually gives the result that the cost of posting them is a cost of sale. In a manner of speaking our "product" is not the physical product but the total service of getting the physical product to the customer's doormat. Without that delivery, we woudn't sell anything. It also seems relevant that a cost of delivery can be allocated to each individual sale.
Googling, I found this link which says, "There is a code here; 7501; Postage and Carriage, that should not be confused with 5100; Carriage. The 7501 code should be used for non sales related postal expenses (such as stamps for a mailshot). The 5100 code should be used for carriage expenses that relate directly to items shipped (such as postage expenses if you are a mail order company)."
I think there was also a relevant discussion on this forum but if I try to search for it to quote I am afraid I will lose this post. (See, my computer intimidates me whenever it gets the chance. I need to intimidate it to restore the balance.)
I forgot that the Sage chart of accounts is a little rigid in its structure, and does not create a conventional TP&L and concede that 7501 may not be the right code to use in this instance
My main point was that conventionally Sales, and Purchases (with associated costs, such as delivery inwards etc) form the Trading Account part of the TPL and gives the gross profit, and overheads form the Profit and Loss Account part of the income statement. We tend to forget that it is a Trading and Profit & Loss Account, not just a P&L
However the 5xxx range in Sage relates directly to the cost involved in making purchases so I still would not use 5100 for any distribution cost. I think in this instance I would create, one possibly 6003 (as delivery could be classed as sub contracted) which is in the Direct Cost section in Sage's CoAs, and .
Just as a by line to the sage CoA. If you look at depreciation charges, they fall in the Overheads section (8xxx range). If you had a delivery van, which takes your sold products to the customer (instead of a courier) the depreciation for the van would need to be seperated from the other assets and moved to a direct cost code.
Hope that made sense
Bill
Edit: Just had a quick look at the link you posted, and would have to disagree with the posting of carriage out. It also says at the beginning
"This is a question best answered by your accountant since they will know your business better than we do. As a guide:....."
I have not used Bright Pearl software and I guess they are using a similar structure to Sage but I think that their interpretation of carraige out is wrong.
Sorry I have done several edits to this to try and make things clearer, and probably making it worse. Having senior moments, and shouldn't try this after a heavy night
Managed to find a simple example of a real income statement, which seperates the ditribution costs after gross profit (Note sage incorporates direct costs in to the pre gross profit figures)
You are very persuasive on the issue of using a Direct Expenses code such as 6003 - partly this appeals to me on the somewhat unscientific grounds that it conceptually "splits the difference" between a Purchase Charge and and Overhead such as 7501.
Nonetheless (I know I am dithering for Britain here!) I don't think your analogy of the delivery van really holds, although I may have misunderstood. The cost of depreciation etc. can't be allocated to each individual sale the way the cost of the stamps to post a package can. Maybe I should picture it as if I went by train to deliver each product?
Alas, I have to be off right now - will think further. Thank you again!
Forgetting Sage for the moment, my main point is on the technical treatment of distribution costs. It is accounting convention that states that carriage out is an expense, and carriage in, is a cost of goods sold.
While this is something I knew; to be sure, I have checked it again from several sources. I have come across the question being asked on other sites, and you are right there are some conflicting views but every reliable source I have read (my own text books, educational establishments, and accounting body websites), states the same as me.
This attachment is a small (6 pages) pdf booklet from an educational body, which describes the reasoning much better than I do (scroll down 3 pages).
I have also looked up the defintion of distribution costs in the Oxford dictionary of Accounting, and it defines them as
"The cost classification that includes the costs incurred in delivering a product to the customer. Examples include postage, transport, packaging, and insurance."
Maybe nominal 7501 is the right one after all?
The more I look at the Sage standard CoA the less I like it's layout. Maybe that's for a seperate topic
Bill
-- Edited by Wella on Sunday 17th of July 2011 11:49:48 AM
BTW shouting at Sage REALLY LOUDLY is a secret shared between finance people, keep it under your hat :)
I find the gentile approach of making sure you say good morning to your computer works equally well
-- Edited by ADAS on Friday 15th of July 2011 06:09:55 PM
I'm not going to get into the habit of talking to my computer - wife yes, kids yes, dog oh yes, but computer would be one step too far, would start getting funny (well funnier) looks from staff!
