Basic Deferred Cost of Sale Example
Table Of Contents
This article explains how Deferred Cost of Sales (DCOS) can be affected when stock items have incorrect stock values. It uses a simple example to demonstrate the impact on your accounts and the steps required to correct stock values before posting Deferred Cost of Sales.
This situation is commonly encountered on newly implemented systems where stock quantities exist but stock values have not been entered correctly.
For a visual explanation of the Deferred Cost of Sales process, see How To: Understand the Deferred Cost of Sales Process.
Overview
In this example:
- A stock item has a quantity in stock.
- The stock value has been left at £0.00 instead of the correct value.
- A sale is processed.
- Deferred Cost of Sales is posted after the stock value is corrected.
The purpose of the example is to demonstrate:
- How incorrect stock values affect accounting postings.
- How Deferred Cost of Sales behaves when stock values are corrected after sales have been made.
- What additional adjustments may be required to bring stock valuations back into line.
Example Stock Item
To recreate this example in a Test system, create the following stock item:
| Field | Value |
|---|---|
| Stock Code | T1 |
| Description | Test Item 1 |
| Stock Type | Automotive > Car Care |
| Selling Price (Gross) | £6.00 |
| Stock Value | £0.00 (should be £1.00 per item) |
After saving the item:
- Adjust 10 units into stock.
- Save the adjustment.
Initial Stock Posting
Because the stock value is incorrectly set to £0.00, no stock value journal is created when the stock is adjusted into stock.
Actual Posting
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0120 | Stock | £0.00 | £0.00 |
| 0123 | Stock Adjusted | £0.00 | £0.00 |
What Should Have Happened?
If the stock value had been correctly set to £1.00, the following journal would have been created when the stock was adjusted in:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0120 | Stock | £10.00 | £0.00 |
| 0123 | Stock Adjusted | £0.00 | £10.00 |
This represents the £10.00 value of the ten items now held in stock.
Create and Process a Sales Order
To continue the example:
- Create a Sales Order for a customer (for example, Rita Richards).
- Add 7 units of stock item T1.
- Process the Sales Order.
- Pay using Cash 1 - Cash Sales Order.
- Issue the Sales Order.
Review the Deferred Cost of Sales Report
Before correcting the stock value:
- Open Accounts.
- Select Other Actions.
- Click Deferred COS Posting.
- Locate stock item T1.
You will notice:
- Order Unit Value = £0.00
- Stock Unit Value = £0.00
Because the stock value is zero, no meaningful Cost of Sales posting can be calculated.
Select Cancel to close the report.
NoteIf Deferred Cost of Sales is posted while stock values are incorrect, the system may either:
- Create no Cost of Sales journal, or
- Create an incorrect Cost of Sales journal that must be corrected manually.
Accounting Entries From the Sale
Cash Receipt
When the payment is taken:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0101 | Debtors | £0.00 | £42.00 |
| 0200 | Sterling Account | £42.00 | £0.00 |
Sales Order Posting
When the order is issued:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0107 | Tax on Sales | £0.00 | £7.00 |
| 0200 | Sterling Account | £42.00 | £0.00 |
| 0300 | UK Sales | £0.00 | £35.00 |
At this stage, the Deferred Cost of Sales journal has not yet been posted.
Correcting the Stock Value Only
Suppose you simply update the stock value from £0.00 to £1.00 and then post Deferred Cost of Sales.
The system would generate:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0122 | Stock - COS | £7.00 | £0.00 |
| 0120 | Stock | £0.00 | £7.00 |
This correctly records the value of the seven items sold.
However, it does not correct the original stock valuation issue.
Why Additional Corrections Are Required
At this point, Khaos Control recognises that:
- Seven items have been sold.
- Three items remain in stock.
- No stock value was ever posted for the original stock adjustment.
As a result, your Stock nominal may show a negative value even though stock remains on hand.
This means further corrections are required to bring the stock valuation back into line.
What Your Accounts Should Show
The correct result should be:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0120 | Stock | £3.00 | £0.00 |
| 0122 | Stock - COS | £7.00 | £0.00 |
| 0123 | Stock Adjusted | £0.00 | £10.00 |
This reflects:
- Ten items originally received into stock (£10.00).
- Seven items sold (£7.00).
- Three items remaining in stock (£3.00).
Correct the Remaining Stock Value
To correct the value of the remaining stock:
- Open stock item T1.
- Go to [ Stock | Adjustments | Adjustments ].
- Adjust all 3 remaining units out of stock.
- Save the adjustment.
- Open [ Stock | Details | Properties ].
- Enter Edit Mode.
- Change the stock value to £1.00.
- Save the stock record.
- Return to [ Stock | Adjustments | Adjustments ].
- Adjust the 3 units back into stock.
- Save the adjustment.
Resulting Stock Adjustment Posting
When the three units are adjusted back into stock with the corrected value, the following journal is created:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0120 | Stock | £3.00 | £0.00 |
| 0123 | Stock Adjusted | £0.00 | £3.00 |
This records the remaining stock value correctly.
Run Deferred Cost of Sales Again
After correcting the stock value:
- Open Accounts.
- Select Other Actions.
- Click Deferred COS Posting.
- Locate stock item T1.
You should now see:
- Stock Unit Value = £1.00
- Order Unit Value = £0.00
- COS Difference = -£1.00
Make a note of the COS Difference Total.
This value determines the journal required to correct the stock valuation.
Interpreting the COS Difference
If the COS Difference is Negative
Post a journal:
- Debit Stock
- Credit Stock Adjusted
If the COS Difference is Positive
Post a journal:
- Debit Stock Adjusted
- Credit Stock
Once noted, post the Deferred Cost of Sales report.
Example Journal Required
For this example, the required correction journal is:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0120 | Stock | £7.00 | £0.00 |
| 0123 | Stock Adjusted | £0.00 | £7.00 |
This accounts for the seven items that had already been sold before the stock value was corrected.
Final Stock Position
After all corrections have been completed, your stock-related nominal balances should show:
| Nominal | Description | Debit | Credit |
|---|---|---|---|
| 0120 | Stock | £3.00 | £0.00 |
| 0122 | Stock - COS | £7.00 | £0.00 |
| 0123 | Stock Adjusted | £0.00 | £10.00 |
This correctly reflects:
- £10.00 originally received into stock.
- £7.00 transferred to Cost of Sales.
- £3.00 remaining in stock.
Verifying Stock Values
After completing the corrections, verify that your stock value is accurate.
Check the Stock Value Report
- Go to [ Stock | List ].
- Select Print - Stock Value Report.
- Make a note of the total stock value.
Check Historical Stock Valuation
- Go to [ Accounts | Details | Stock Value | Historical Valuation ].
- Click Go.
- Compare the stock value shown with the Stock Value Report.
The totals should agree, confirming that the stock valuation has been corrected successfully.