Accounting Treatment Inquiry on Indirect Costs Included in Inventory: Discussion on Account Classification Before Profit and Loss Carry-Forward
An ERP functional consultant (without accounting background) raises: In fiscal year 2019, purchased goods had direct costs of $100 and indirect costs of $20, posted to both income statement and balance sheet accounts. If goods remain unsold at year-end, is it compliant to retain the $20 indirect cost on the income statement? This article explains cost recognition principles and recommends transferring indirect costs to inventory-related balance sheet accounts.
Hello, I am a functional consultant for ERP software, without an accounting background, but I have received some financial training. My questions may seem basic, but they do trouble me, and I hope to get your guidance.
Scenario description:In fiscal year 2019, I purchased an item from a supplier with a direct unit cost of $100 and an indirect cost of $20. After posting, the general ledger entries are as follows:
Income statement accounts
- Purchases (Debit): 100
- Direct Cost Application - Retail (Credit): 100
- Indirect Cost Application - Retail (Credit): 20
Balance sheet accounts
- Accounts Payable (Credit): 100
- Inventory - Direct Cost (Debit): 100
- Inventory - Indirect Cost (Debit): 20
Assuming the item was not sold in 2019, and then I perform a profit and loss closing, this $20 indirect cost will remain on the income statement. Is this treatment correct? According to accounting principles, costs should typically be recognized as expenses only when the goods are sold. So, before closing the profit and loss, should this indirect cost be transferred to a balance sheet account? Or is the current treatment acceptable? It should be noted that this indirect cost is a type of cost that should be included in inventory value.
Any answers would be greatly appreciated, thank you!