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Our client dont want to include Direct cost Applied and COGS accounts in Income Statement.

Up to this month Direct cost Applied Account is getting balanced with COGS since the purchases and sales are done in same month.

In this month they have done purchases in this month and want to do sales of the item in future month.In this situation the value is getting remained in Direct Cost Applied account and when they run the Income Statement and Balance Sheet reports they dont match to each other since the Income Statement dont include Direct Cost Applied Account.

Can any one please help in balancing the reports without including Direct Appllied Account.

Below is the general affect of accounts when Purchases and sales are done:-

When the purchase order is invoiced the Accounts affected are

1)Inventory
2)Account Payable
3)Purchase Account
4)Direct Cost Applied Account

When the Sales order is Posted the Accounts Affected are

1)Inventory
2)Account Receivables
3)Revenue Account
4)COGS

When the Purchases and Sales are made in the same month the Direct Cost Applied account
gets balanced with COGS.

Where as in a situation where Purchases are done in one month and Sales are done in the other month the value will be remained in Direct Cost Applied account until sales are done for that item.

The point of having Direct Cost Applied is because inventory cost cannot be treated as expense (loss) until the goods are actually sold.

When you post a purchase of goods, you debit the purchases accounts (increasing your expenses / loss), which you shouldn't - because there is no loss if you have the goods, and until you sell the goods. That's why you credit the Direct Cost Applied account to neutralize the expenses. Basically, from Income Statement perspective, there is no expense here.

When you sell goods, then you debit the Cost of Goods Sold account, which increases your expenses.

(the description above is simplified, and it doesn't include what happens at balance sheet side for payables, receivables and inventory of either of transactions)

If both sales and purchases happen in the same month, then Direct Cost Applied and COGS get balanced, and that's expected (because then your inventory has no effect on your profit / loss).

However, if the goods are not sold in the period when they are purchased, then you must not show them in your Income Statement - and if you had excluded the Direct Cost Applied account from it, then only purchases would show there, meaning that the expense has actually occurred, while it hadn't.

I would say that you need to talk to your accountant once again, and make sure that both COGS and Direct Cost Applied are configured as Income Statement accounts, and whatever happens in NAV is completely correct, as far as IAS/IFRS rules go.

Instead of trying to understand the concept behind these accounts, it looks like you just copy and pasted from a blog.

Hi,

This is Jaishanker, I have few doubts in cost accounting.

When a purchase of inventory is made, 4 accounts are hit:
1000 Inventory
2050 A/P
2100 Purchases
2150 Direct Cost Applied

When the items are sold, 4 accounts are hit:
1000 Inventory
1050 A/R
1100 Sales
1150 COGS

Case 1).Invoice a purchase order for $10.00 *3 qty for item A, the following happens

Purchases A/c $30 Dr
Accounts Payable A/c $30 Cr

Inventory A/c $30 Dr
Direct Cost Applied A/c $30 Cr

Case 1.1). Now, suppose i need to return 1 qty of item A to the vendor and the vendor is only willing to give you credit for $8.00 per qty. When you post the credit, the following will happen:

Accounts Payable A/c $8 Dr
Purchases A/c $8 Cr

Direct Cost Applied A/c $8Dr
Inventory A/c 8 Cr

In this case we have to post additional two entries for Adjustment

Direct Cost Applied A/c $2Dr
Inventory A/c $2Cr

Case 1.2) Invoice a Sales order 1 qty at $12.00 for item A, the following happens:

Accounts Receivable A/c $12 Dr
Sales A/c $12 Cr

COGS A/c $10 Dr
Inventory A/c $10 Cr

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Please confirm the above entries then give me income statement for the above transaction.
Plz.