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Posted by Paul Thomas on July 8, 2007, 3:55 pm
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> Hello, I'm hoping to start an online retail business and have been
> studying accounting, however most text books don't delve into real
> world situations deeply. I trying to figure out the best way to
> handle the situation where the price of inventory goods on my PO
> doesn't match the Invoice price we receive from the vendor. I know
> this is call a "purchase price variance" but my questions are:
>
> 1) Is it required to track this variance? I think it's wise to do so
> since I can then determine if this particular vendor is always
> charging me more (or less) and if I should continue to use this
> vendor.
There's no accounting requirement to do so. For your business it's not
necessary if you are handling the books.
> 2) From the above I would imagine the ppv needs to be tracked by
> vendor and not just a generic account or assessing a vendor would be
> hard to do correct?
The only reason to bother to know is in if they are overcharging you or
billing for prodicts not delivered. Otherwise your PO pricing isn't gospel
to their invoice, as you can easily not have the correct per-item cost in
your records.
> 3) I know a PO does not impact the financials since it's only a
> "request" for goods and no money has changed hands at this point so
> how does this non-impact document relate to the actual invoice which
> does effect the financials since it's a payable ?
It doesn't, so tracking it in a small business is not a priority.
Now, you need to know what your cost is, so you can price accordingly,
anything beyond that is wasting time, and time is money.
> 4) Most accounting text books I'm looking at teat this variance in the
> environment of manufacturing and standard costing and not retail so
> how to handle this in retail. Also, I'm planning on using the FIFO
> perpetual costing method, does this make a difference?
It doesn't get into the retail environment, at least not at the locally
owned and locally operated business.
Retailers like Wal-Mart probably have that data, and more (the variance
between what their PO said, the amount on the invoice, and the amount they
end up paying), but like I said, for small businesses, you're wasting time,
and lots of it.
> Any guidance on how to handle the PPV and accounts I should be setting
> up will be greatly appreciated.
What will you do with that data?
If you can answer that, then you'll know if you need to bother. Once you
know if you need to bother, you'll know how to best structure your books and
accounting controls.
--
Paul A. Thomas, CPA
Athens, Georgia
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