In order to see how Free Accounting records the cost of items in Inventory let us take the following example:
Your company purchased (i.e. created Receipt documents) the same type of widgets from three different Vendors at different cost:
- At first you purchased 5 widgets from Vendor 1 costing $5 each.
- Then you purchased 10 widgets from Vendor 2 costing $4.5 each.
- At last you purchased 20 widgets from Vendor 3 costing $4 each.
All the purchases were recorded in Free Accounting Inventory Control Journal as IN transactions. The total quantity of widgets in Inventory is 35 and their total cost is $159. Now let us see how Free Accounting Inventory behaves depending on the cost calculation method when you sell these widgets (i.e. create Invoice documents).
First In First Out (FIFO)
E.g. you want to sell 30 widgets at a time. With the FIFO method the widgets you bought at first will be sold at first. Thus the following OUT transactions will be recorded in Free Accounting Inventory.
- 5 widgets costing $5 each. The total cost is $25.
- 10 widgets costing $4.5 each. The total cost is $45.
- 15 widgets costing $4 each. The total cost is $60.
The COGS account will be credited by the total of $130 ($25 + $45 + $60).
Last In First Out (LIFO)
Selling 30 widgets with the LIFO method will show another results in Free Accounting Inventory.
- 20 widgets costing $4 each. The total cost is $80.
- 10 widgets costing $4.5 each. The total cost is $45.
The COGS account will be credited by the total of $125 ($80 + $45).
Average Costing Method (ACM)
According to ACM Free Accounting calculates the average cost of a widget. Free Accounting truncates the result to hundredth, but for the whole quantity of widgets ACM doesn't allow even a half cent to be lost:
Widget Average Cost = $150 / 35 = $4.28
Thus only one OUT transaction will be recorded in Free Accounting Inventory Control Journal:
- 30 widgets costing $4.28 each. The total cost is $128.4
The COGS account will be credited by this sum - $128.4.
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