Hi Ken,

If they are a retailer like a Wall-Mart, Sear, etc, as opposted to a car dealership that users a perpetual inventory system for example, they could determine cost-of-good sold using a retail method of inventory costing. In this method the cost of goods sold is determined based on the cost of merchandise available for sale to the retail price of the same merchandise.

Why not have the system charge everything initially to cost of good sold, and make monthly journal entries to adjust inventory on hand based on the retail method of accounting. It would be important that the system be on the accrual basis of accounting. Under the accrual basis of accounting, revenue is recognized when earned, and expenses are recognized when incurred, regardless of when cash actually changes hands. As your client received merchandise ordered via PO, the goods should be inspected to ensure they comply with your PO as to color, size, quantity, etc. If your customer accept the shipment, a legally enforceable contract arises , and an accounts payable should be credited with a corresponding debit to cost of goods sold based on amounts on the invoice. The cost of good sold would need to be adjusted before preparing financial statements by bring inventory on hand back to amount computed using the retail method of inventory costing.

Again I will mention the importants of being consistent. It is probably more important to handle each transaction consistently than to be correct as to whether shipping and handling cost should be added to inventory or expensed. This sounds strange, but it's true, because if the system handles inventory consistently, financial results will be correct over serveral accounting periods.

LelandJ