What is the “cost” of an inventory item that you purchase? For many businesses we talk about the “landed cost” of the item, which can include not only the purchase cost of the item, but also the shipping cost of the item. In this article I’ll talk about a few ways to handle this in QuickBooks.
The landed cost of an item is usually considered to be the cost of the product plus any relevant logistics costs, such as transportation, warehousing, handling and so forth. The can also be called the total landed cost or net landed cost.
For my example we will receive an item called sprocket. We’ll receive 10 of them, with a unit cost of $10.00, plus a shipping fee of $10.00 (sorry about the unoriginal values here). If we were to just receive the items our item cost would be $10.00 each, but what we want for a landed cost is actually $11.00 each.
Shipping Billed with Item
If you receive a bill for an item and the shipping is included in the same bill, you can do a little math in your head to include shipping in the item cost. Let’s look at a receipt of an item, with the bill:
I received 10 at $10 each, plus a shipping fee of $10, so I simply enter a total cost of $110.00. If you have several items in the receipt but one shipping cost you have to allocate the shipping cost to each of the received items yourself.
Shipping Billed Separately
What happens if you get the shipping bill later? Perhaps you are paying a separate company for the shipping fee so it doesn’t come in the bill for the items themselves. There are two ways to handle this.
- Go back to the original item receipt and adjust the amount to reflect the shipping charge. This works if the shipping charge comes from the same company, and you don’t mind adjusting the original bill to include these charges. This is a simple approach, but generally not the best way to handle things.
- Create a special shipping clearing expense account to use when entering the bill, and then doing an inventory adjustment. This will deal with most situations properly, but it does take extra work.
A clearing account is one that you set up in your chart of accounts to help with the process of moving a value from one place to another. Generally the idea is you create a place to hold the value, and then you adjust it away so that the clearing account doesn’t have any value left behind.
In your chart of accounts create a new expense account and call it Shipping Cost Clearing Expense.
You will receive the item as before, but since we either don’t know the shipping cost or the shipping charge is from another vendor, you will only enter the actual purchase cost of the items. In this case, we enter $100.00.
As you can see below, we have an average cost of $10.00 per item (in this case, because we didn’t have any on hand prior to this transaction).
Later we receive the shipping bill, and we will enter the cost of the shipping ($10.00 in our example). They key here is to use the clearing expense account, rather than your normal shipping expense account. If you stop now, you have expensed your shipping, you have not allocated the cost to your inventory.
Now you are going to enter an inventory value adjustment to move the shipping cost out of the holding account and into inventory. Do not change the quantity. Make sure that you:
- Select the shipping cost clearing account for the adjustment account.
- Check the value adjustment box.
- Enter a new value amount that is the total of the current value plus the shipping charge.
This moves the cost from the holding account into your inventory asset account. If we look at your item you will see that the average cost is now $11.00, which was our target. PLEASE NOTE that if you have existing items, or multiple receipts, you won’t see this as clearly. BUT the process will still work correctly if you follow the steps above.
If we look at a QuickReport for the clearing account we see that the net balance is zero – which is a good check to see that all of our inventory adjustments have been entered for these kinds of situations.
Hope that helps!
About the Author (Author Profile)
Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70’s, focusing on inventory and accounting software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor. Look for Charlie’s articles in the Accountex Report blog, as well as his California Wildflower Hikes blog.