Purchase Variance Account
The account is typically called a "variance" account because the value entered into Inventory Control at the time the merchandise arrives may be slightly different than the invoice when it arrives some days later. The balance in this account will always be the sum of the value of inventory received (but not yet invoiced), plus or minus the variance on prior receipts.
Using a strictly manual account system for inventory, the inventory asset account would be debited and the Accounts Payable liability account would be credited when merchandise is received from the supplier.
Using Spectrum, the user may access information about inventory quantities and valuation. As soon as merchandise arrives at the loading dock from the supplier, the user will be able to take receipt of it. It may be several days before the invoice for the merchandise is received by mail from the supplier. At that time, the user will enter the invoice into Accounts Payable. In order to account for these two distinct, separate operations, the user will access a common clearing account in the General Ledger. This account could be named "Purchase Variance," "Inventory Variance," or Pending Supplier Payable," for example. Because most businesses receive the merchandise before the inventory, this account is usually placed with other liabilities as a pending payable account.
Periodically, it will be appropriate to make a journal entry between the purchase variance account and cost of goods sold account in the net amount of the variance. This may be done monthly, quarterly or annually.
Using T-accounts, the following is an example of how this account will work in the General Ledger:
|
INVENTORY |
ACCOUNTS PAYABLE |
|
|
Debit |
Credit |
|
|
(1) 100.00 |
(2) 99.50 |
|
|
COST OF GOODS SOLD |
PURCHASE VARIANCE |
|
|
Credit |
Debit |
Credit |
|
(3) .50 |
(2) 99.50 |
(1) 100.00 |
|
(3) .50 |
||
- Items delivered to warehouse, received into inventory at $100.
- AP invoice arrives by mail, recorded in Accounts Payable at $99.50.
- $.50 Purchase Variance credited to Cost of Goods Sold using G/L journal entry.
