I write this in connection with a business that only sells a few products a year but has numerous direct costs directly attributable to those Sales.
The management wants a bookkeeping system that updates itself to show an estimate of profitability on any given date.
At the moment all the Direct Costs go to the p&l as expenses and then monthly a WIP figure is produced which goes between the BS & the P&L. On the day that the WIP is applied to the books, the books are correct. However the day after when a direct cost comes in, the books are not correct from a profit point of view.
Has anyone ever used an approach that turns that around? This would be Direct Costs going to the WIP balance sheet ledger and when a product is sold the sale of the product is recorded at the same time as its direct costs on the P&L. If a product is written off then at that time the Direct Costs would move to the P&L as then they are no longer WIP.
I write this in connection with a business that only sells a few products a year but has numerous direct costs directly attributable to those Sales.
The management wants a bookkeeping system that updates itself to show an estimate of profitability on any given date.
At the moment all the Direct Costs go to the p&l as expenses and then monthly a WIP figure is produced which goes between the BS & the P&L. On the day that the WIP is applied to the books, the books are correct. However the day after when a direct cost comes in, the books are not correct from a profit point of view.
Has anyone ever used an approach that turns that around?
This would be Direct Costs going to the WIP balance sheet ledger NEVER. Besides how does that resolve anything? Just put direct costs to direct costs.
and when a product is sold the sale of the product is recorded at the same time as its direct costs on the P&L. If a product is written off then at that time the Direct Costs would move to the P&L as then they are no longer WIP.
Be interested in your thoughts.
Yes, its called management accounts. But, do not enter an invoice for 2 days after, then one day after they are not correct from a profit point of view.
Its likely overkill for a business which only sells a few products.
Take a look at some Accountancy training that covers ' costing' specifically. You can buy a one off module from the likes of Kaplan. This will assist with most of the queries you are raising.
The few products that the business sells are high value and thus so are the costs.
In answer to your question, "Besides how does that resolve anything?", to my mind, by putting direct costs to the WIP, where they remain until a sale of their related product, the books are substantially more accurate.
I take your implied point that this might be more expected of management accounts. What I am striving for is a situation where the bookkeeping needs little adjustment to produce management accounts or by the accountant at YE.
The question is, is it a better system to follow the DJKL approach that you reproduce above or one where all purchases go direct to the p&l?
Does anyone have an opinion on that?
I note DJKL's reference to the assumption of cash accounting in order to simplify the example but can't see how that changes the question.
Although it's been decades since I did a book keeping course this is fairly basic stuff and I understand the 2 approaches. Rest assured, I won't be giving advice on a subject that I don't understand.
