How do I link inventory to general ledger accounts?

If you integrate inventory into the general ledger, the system updates the general ledger with inventory cost information each time there is inventory movement.  If you don't, the system does not update inventory on the general ledger, and you will have to do so manually to obtain accurate financial statements.

If you integrate inventory into the general ledger, the system updates the general ledger with inventory cost information each time there is inventory movement.  If you don't, the system does not update inventory on the general ledger, and you will have to do so manually to obtain accurate financial statements. 

 NOTE: To integrate inventory to general ledger accounts you need to create inventory groups. 

Purpose of Inventory Groups

You can use inventory groups for two purposes:

• To control inventory integration into the general ledger.
• To let you categorise your inventory into logical areas.

You must use inventory groups for integration, but you do not have to use them as categories.

An inventory group consists of a set of general ledger accounts. You link each inventory item to an inventory group. For integration purposes, you only need one inventory group. If you use the Setup Assistant to create a company, the system creates one or more inventory groups for you.

Inventory groups control the amount of detail you can see in the general ledger. For example, you can create one inventory group for all your inventory items. All inventory activity will update the same general ledger accounts. However, you may need to see some key inventory values separately in your general ledger. For example, if you pay royalties on sales of certain items, you may like to see them separately in the general ledger.

You achieve this by creating additional inventory groups, each of which contains its own set of general ledger accounts. This gives you the analysis you require. You also gain two additional benefits:

• You can see the financial implications of groups of inventory items in your business.
• You can use general ledger budgets to budget inventory activity and track performance of these groups.

Integration accounts do not have to be unique per inventory group - you can use the same account in one or more groups. You can therefore have many groups, all sharing the same sales account but using a different inventory account, or the other way around.

In fact, instead of analysing groupings of inventory in your general ledger, you may prefer to analyse them within your inventory system only. To do this, you also create additional inventory groups. However, you give each group the same integration accounts. This way, there is no inventory analysis in the general ledger. You then achieve your analysis by means of inventory reports, many of which you can run in inventory group sequence. These reports give you totals per inventory group.

If you use both physical and service items, which we discuss later, you usually have separate inventory groups for service and physical items.

 NOTE: Note that you can also use inventory categories for analysis, and they do not contain general ledger accounts.

Integrate Inventory to General Ledger

To access this function

• Select the Setup...Inventory menu option.
• You can also use the System Navigator to navigate to this function.

The option is available under the Integration / Groups tab.

You can change this field at any time. However, if you do so, you will create a confusing situation in your general ledger. If you decide to change this field, you should do so at the start of a financial period. When you produce financial statements, you will then at least know which months include inventory and which months exclude inventory.

 TIP: The safest method is to choose one integration method and stick with it. Unless you have a good reason to do otherwise, choose full integration.

When you process sales or purchase transactions, the system updates a customer control account or a supplier control account in the general ledger. To keep the general ledger in balance, the system needs to create a contra entry. The contra entry can happen in two ways, depending on whether you wish to integrate inventory into the general ledger:

If you do not integrate inventory, the general ledger does not automatically reflect any inventory activity. If you want to see a meaningful balance sheet, you need enter manual journals to bring the inventory account up to date. You would derive the value of these journals from your inventory reports.

Which method should you use? There is no simple answer to this question. Here are some considerations:

• If you are primarily a service organisation, and you do not sell many physical items, do not integrate inventory.
• If you mainly sell physical goods, you should consider integration.
• If you control your inventory accurately, and you do not allow the theoretical quantity on hand to be negative, you should integrate inventory.
• If your theoretical quantity on hand is often negative, and inventory costs vary considerably, non-integration is a better way to go.

Integration Entry Type

If you integrate inventory to the general ledger, you must select an entry type to use for general ledger integrating journals.

We suggest that you dedicate an entry type solely for inventory integration. This lets you print an integration audit trail using the Entry Type Details report.

Inventory Group Table

You use inventory groups to control integration into the general ledger. Even if you do not integrate inventory into the general ledger, you need to have at least one inventory group. The reason is that the inventory group also contains general ledger accounts to integrate customer sales and supplier purchases.

You can also use inventory groups to analyse inventory activity in categories. You can do this on the general ledger, or via inventory reports, or both.

You have to link each inventory item to an inventory group.

You can create up to 999 separate inventory groups. The system numbers each one from 1-999.

To maintain inventory groups

• To add a new group, enter its fields.
• You can change inventory group information at any time.
• To delete an inventory group, select it in the table and click the Delete Line button. The system checks whether there are inventory items that use this group. If no items use the group, the system deletes the line.

In the remainder of this topic, we look at the inventory group fields.

Description

Enter a description for the group. You can change the description at any time.

Default Tax Types

When you create a new inventory item in the Inventory Items function, you assign an inventory group to the item. The system defaults the tax type(s) you specify here to the inventory item. When you purchase or sell the item, you can override these tax types.

You use these defaults as follows:

• If you do not use tax or the group mostly contains tax-free items, then set both the Default Buy Tax and Default Sell Tax columns to Tax Type 00, in other words, to 'None'.

• If you are in a country where you can claim a tax credit for items that you purchase, set the Default Buy Tax and Default Sell Tax columns to the requisite tax types.
• If you levy tax on some or all of your sales, but you cannot claim a credit for purchases, set the Default Buy Tax column to zero and the Default Sell Tax column to the requisite tax type.

General Ledger Accounts

If inventory integrates into the ledger, the system uses the following accounts:

NOTE: If inventory integrates to the general ledger, you cannot change a group's inventory control account once you use that group. There is a technique that lets you choose whether to track costs of inventory service items in the general ledger. This technique involves the creation of inventory groups specifically to handle these items. For details about this, refer to the section Inventory Groups as below.

The system uses fewer accounts if you do not integrate inventory to the ledger: