hey it's patti scharf CPA and co-founder of catching clouds the leader in
e-commerce accounting today I want to continue my talk on inventory make sure
you stick around to the end because I'm going to show you some cool tricks in
Xero that helps make this process a bit easier but before we get started if
you're not familiar with inventory or cost of goods sold make sure you watch
this earlier video that I created it'll kind of get you up to speed on what
those terms mean but let's get started
okay so from that earlier video you should know that when you buy product
that's going to be resold that becomes inventory and it doesn't turn into cost
of goods sold until your inventory is sold but what about that time before you
actually have inventory when you don't have anything in your warehouse or
sitting in Amazon you just have maybe paid out some money like where does that
go does it go to inventory does it go somewhere else I'm so glad you asked
that goes somewhere else that goes into something called prepaid inventory it
can also be called just deposits or vendor deposits or something like that
inventory does not actually belong to you until inventory belongs to you so
that's what this talk is all going to be about so what is prepaid inventory
prepaid inventory it's a current asset on your balance sheet current means that
it's gonna be turned into cash or into some other form within a year okay and
asset means you own it it's something that you have basically titled - so you
don't have inventory yet but you have this money that you've given to somebody
else you're owed something back in exchange for that okay let's say you put
down 20% on $100,000 order so you've paid somebody $20,000 let me show you
how to do that in Xero it's super easy you just go to your checking account and
you're gonna do a spend money transaction but when you do that it's
not exactly gonna be spend much up here this little drop-down box you're
gonna go to prepayment you'll notice that it turns it kind of yellowish and
we're gonna pay this to Acme supplier okay we'll just do that today and we're
gonna say that this is for 20%
and we're gonna send this to an account called prepaid inventory you may need to
set this up in your chart of accounts okay
now when you hit save you'll notice that if you look at the checking account it
came out of your bank balance which is totally accurate because you just paid
somebody something usually this is with a wire or something like that
bonus tip you may want to check out veem for doing an international wire payment
they don't currently have any fees or anything for doing that so it's pretty
slick okay so you have this prepayment if you were to go into purchases which
is where all of your bills are stored you will see it's like got this little
yellow post-it note that says PP for prepayment on it okay and it shows that
it's been paid even though nothing is due this is exactly what we're looking
for that is very good okay so you've paid this if you look on your balance
sheet you should see an amount for prepaid inventory and the amount of
$20,000 it's exactly what you want to see you have paid money you've kept
track of that money that you've paid but you are just waiting to receive your
inventory okay now before we go any further I want to talk about fo B origen
vs fo b destination fo B stands for free on board or sometimes you'll see it as
Freight on board what this is is it's the shipping designation so somebody is
shipping product from one place to another place and they have to tell you
at what point in that process the title transfers to you so if it's fo B
shipping point then or sometimes fo B origin those are synonymous it could be
at the the suppliers place of business or maybe it could be at like the port of
in in San Francisco or something like that
so let's say your suppliers in China this
f OB San Francisco once those products get to San Francisco and starts getting
sent all the way to you the title transfers to you f OB origin means that
you're gonna have some inventory in transit so you own this inventory but
it's not sitting in your warehouse yet it's not sitting in Amazon it's it's
somewhere in between but it belongs to you
so some people like to create an inventory in transit account on their
balance sheet for that specific purpose sometimes you can just put it straight
into your inventory it doesn't really matter do whatever makes the most sense
to you now that's a phobia origin fo B destination is the title doesn't
transfer until it reaches its final destination which is you so when it
shows up at your warehouse and you sign off as having received it you say yep
everything looks like it's in good shape I will now take over title that belongs
to you and that becomes your inventory you don't need that inventory in transit
account because boom straight into your inventory cool so my first example is
going to be f OB origin so let's say this is shipped to let's say f OB
San Francisco ok the supplier actually shipped it out August 1st it arrived in
San Francisco on August 15th it arrived at your warehouse September 1st okay
this is for 40% of your thing so you create a bill an invoice in Xero for 40%
of the order it's going to be dated August 15th it's not the date that it
left their warehouse it's when it hits San Francisco which is what you guys
agreed upon that indicated when the title would change hands okay so 40% hit
the f OB origin on August 15th you record 40% in your in your bill this is
how much you owe because they've only fulfilled 40% of the order
and so you owe 40,000 of that total $100,000 order okay
we're going to approve it and then it will pop up with allocate outstanding
credit of $20,000 that's that prepayment that we just showed you that I just
showed you how to build you can allocate that you can tell it exactly how to
allocate it and then you'll see there's only $20,000 remaining on this invoice
because you've already paid 20,000 of the 40,000 boom so now if you were to
look at your let's go look at your balance sheet first if you look at your
balance sheet you'll see you've got $40,000 in transit you'll also notice
that the prepayment completely disappeared this is because 0 is super
cool in how they handle their pre payments the system knows that if you
plot if you apply a pre payment against a bill it knows to pull it out of the
prepaid inventory and apply it to your inventory in transit so that worked
super slick just the way I wanted it to okay now let's say they send the other
60% of the order they they shipped it on August 20th and it hit the FO B San
Francisco September 1st you received it in your warehouse say September 15th ok
the date you're going to record it is going to be September 1st because that's
when it hits San Francisco ok again we go in here it's 60% of the total order
it's going to inventory in transit because it hasn't made it to Delaware
yet and if you go to your balance sheet you will now see the full hundred
thousand dollars in inventory ok oh so this is inventory in transit so
you're going to want to at some point transfer that over to just plain old
inventory this is why some people like it just to go to inventory other people
they want to track what's in transit as opposed to what's on hand once it
actually hits your warehouse you can do a quick journal entry to move that out
of inventory and transit to inventory and you're done if you have it go
straight to inventory then it's already there okay all right now let me show you
fib destination fo B destination is exactly the same the only thing that
changes are the dates so on that first 40,000 that was let's see it left the
suppliers warehouse on August 1st it hit San Francisco on August 15th and then it
arrived with you in Delaware on September 1st you don't care when it hit
San Francisco because the title doesn't transfer until it reaches your warehouse
on September 1st because you are a faux B destination okay so the invoice date
is going to be September 1st that means this inventory is going to
hit on September 1st and instead of August 15th like f OB origin again exact
same thing you can allocate the credit
now you have a clear indication of how much is still due I'm going to go back
to bills the other one the 60% left on August 20th
we don't care when it hits San Francisco it arrived at the destination on
September 15th so we dated September 15th and this is again going to be
inventory now in well let's look at the balance sheet really quickly if you go
to the balance sheet you will see if you change this to September well in August
you'll see that there's the prepaid inventory amount and then you'll see in
September that it's all inventory now okay if you look at your bills under
purchases you should see those two bills totaling the amount that you still owe
of $80,000 you'll see this one here has like this little icon it shows that
there is a prepayment applied to it okay so everything is nice and clean and
pretty in here I would recommend with your bills to include the purchase order
number as your reference number let me see if I can get back do that for you so
like instead of reference a fo B destination I would put your purchase
order number there so that when you're looking at this list you know exactly
how to track which shipments went where and where they came from and stuff like
that okay and one last comment is I set up this
new inventory untracked account this is a current asset it's not showing as
inventory in the system that's because Xero wants unit numbers
and all this kind of stuff for your inventory the reason we don't do that is
because our clients use a separate cloud inventory application I have another
video about that here that you should probably check out I think that's
probably the number one thing that you can do for your business to make sure
operations are running smoothly I hope you found this video helpful if you are
just getting started in the e-commerce and starting to set up your own store
and things please check down below I've got a link
and to a an e-commerce startup guide that I think would be really helpful for
you otherwise I hope you like this video if you did please like comment and share
if you haven't already please subscribe and I'll catch you later