Purchasing of goods for manufacturing

When you run a business that manufactures goods, such as fishing tackle, it is important to correctly record the purchases of materials and goods that will be used in the manufacturing process. These materials are considered input goods or raw materials and must be reported correctly to provide an accurate picture of the company's finances.

In this post, we'll go over how to record purchases of goods that will be used to make other goods, such as the purchase of hooks to be used to make fishing lures. We'll also explain which accounts you should use in your accounting.

Example of Accounting for Purchase of Goods

Let's say your company has purchased hooks for 10,000 SEK excluding VAT from a supplier. You plan to use these hooks to make fishing lures.

• Price of the hooks excluding VAT: 10,000 SEK
• VAT (25%): 2,500 SEK
• Total price including VAT: SEK 12,500

1. Record the purchase of hooks (raw materials)

Since the hooks are raw materials that will be used to make fishing lures, they should be recorded as assets in your inventory under account 1400 (Inventory) . When you record the purchase, you should also include the VAT in a separate account, 2641 (Input VAT) .

Accounts used:

• Debit (D) : 1400 (Inventory) – 10,000 SEK (excl. VAT)
• Debit (D) : 2641 (Input VAT) – 2,500 SEK
• Credit (K) : 2440 (Accounts payable) – 12,500 SEK (incl. VAT)

Accounting entry:

Explanation:

• 1400 (Inventory) : When you purchase raw materials or goods for further manufacturing, they are reported here. You increase your inventory by 10,000 SEK (the cost of the hooks excluding VAT).
• 2641 (Input VAT) : The VAT of 2,500 SEK is reported here and can later be deducted when you file your VAT return.
• 2440 (Accounts Payable) : The supplier's invoice creates a liability to be paid, which is posted to this account.

2. When the hooks are used in the manufacture of fishing tackle

When you use the hooks to make fishing lures, these raw materials will be consumed in the manufacturing process. Here, you will transfer the value of the goods used from inventory to cost of goods sold (COGS) , which reflects the cost of the goods you actually used in production.

Accounts used:

• Debit (D) : 5000 (Cost of goods sold) – 10,000 SEK (excl. VAT)
• Credit (K) : 1400 (Inventory) – 10,000 SEK (excl. VAT)

Accounting entry:

Explanation:

• 5000 (Cost of Goods Sold) : When the raw materials (in this case, hooks) are used in production, their value is moved from inventory to cost of goods sold. This represents the cost incurred when raw materials are consumed in the production of fishing tackle.
• 1400 (Inventory) : The value of the used hooks is removed from the inventory, reducing the total amount of inventory.

Summary of Accounting:

Explanation of Accounts:

• 1400 Inventory : This account is used to record goods that are in stock and are intended for sale or production. When goods are purchased, this account increases.
• 2641 Input VAT : Here you report the VAT you pay when purchasing goods and services. You can later deduct this VAT when filing your VAT return.
• 2440 Accounts Payable : When you have received an invoice from a supplier and are due to pay for goods, the debt is posted here. You are required to pay this amount within the agreed time frame.
• 5000 Cost of goods sold : When raw materials are used in production, this is recorded in a cost account. This shows what the manufactured goods actually cost to produce.

Conclusion:

Recording purchases of goods to be used in manufacturing is an important part of keeping your company's finances in order. By correctly recording the goods as inventory when purchased and then moving the value to cost of goods sold when they are used, you get an accurate picture of both your inventory and your production costs. Using the right accounts for each transaction also makes your accounting clear and easier to follow when it's time for VAT returns and annual accounts.