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in this video we're going to take a look at the accounting side of the purchase order process we're going to see what accounting entries are made when you receive inventory when you receive a purchase invoice against a purchase order and then what happens when you pay your supplier we're going to see what happens when the invoice value does not match the value at which you've received the inventory and then finally I'm quickly going to cover the differences between cost of sales accounting and periodic accounting the process starts by adding products to a purchase order when you add a product to a purchase order the account code that's used is the one that's set as the asset code on that particular product I've also added an on stock item to this purchase order to show you the difference between the two we've not got any tax on this purchase order to make the numbers simpler so we've got a single inventory item here costing 10 pounds and then a shipping charge of two pounds when I go to receive inventory Brightpearl gives us a reminder on the right-hand side of the unit cost of each of these items in your base currency so let's hit submit which receives that inventory item into stock we've also just created our first accounting transaction because we've just received an asset that's worth 10 pounds so let's go to the general ledger but we can see we've got a debit on the stock or inventory code and then a credit on something called stock received not invoiced we can also see this on the balance sheet which is the report that shows all of our assets and our liabilities on the profit and loss report or called the income statement if you're in the US we can see that there's nothing there yet and that's because all we've done so far is move asset around we've not made or lost any money the next step is to receive the purchase invoice that the supplier has sent us and we do that from the purchase order itself so let's find the purchase order open it up check that the values match the invoice that the supplier has sent us and I'll show you what happens if they don't match a bit later make any changes here so that they do match and then click receive invoice enter the supplier invoice reference choose the invoice date the date that it's due and then receive the invoice that's now created the second accounting transaction which we can see from the general ledger what it's done is it's moved the ten pounds from the stop received not invoiced across to the creditors control account and because we also got a line on that purchase order for freight and shipping we've got an extra two pounds so the total balance on stock received not invoiced is going to be zero we're going to owe a supplier twelve pounds and then it's going to be two pounds showing on the profit and loss report so let's go across to the balance sheet to see that well we've still got the ten pounds of stock but we now owe the supplier twelve pounds instead of having stock received not invoiced we've made a loss because that two pounds has gone on to the profit and loss report as freight and shipping costs the last thing to do is pay the supplier so let's go suppliers each creditors or vendors accounts payable if you're in the u.s. click the little cash icon which takes us to the payment allocation screen let's choose a bank account pay this in full and allocate the payment that's created the third accounting transaction which we can see on the general ledger where we're simply moving money between the bank current account and the creditors control account or accounts payable so let's go to the balance sheet where we used to over the supplier twelve pounds and now our bank account chose minus twelve pounds whilst it's not technically part of the purchase order accounting I'm going to sell this up so that you can see how sales and cost of goods sold are very closely linked to the purchase order process so we've got a sale here for one of these Cannondale bite cubs it's the item we bought for ten pounds what we need to do now is fulfill and ship and it's the shipping point at which we assign the cost of sale to this sales order because we've now just shipped items we need to record a decrease of asset or a decrease of inventory and that's created an accounting transaction let's go and have a look at the general ledger where we can see the most recent transaction here is moving asset from stock or inventory across the cost of goods sold if we go to the balance sheet we can see we no longer have any inventory it's been moved across to the profit and loss report as cost of goods sold when I later invoice the sale that will appear on the profit and loss or income statement as sales revenue now what we're going to do is see what happens when you receive inventory at one value and then when the purchase invoice arrives later you see that the actual value you need to pay the supplier is slightly different so what we have here is the same hub with the price of ten pounds we're going to receive the inventory at this price because that's the only price we have that's created the first accounting transaction just the same as before which we can see on the general ledger let's say that we've now received the purchase invoice so I'll go back to the purchase order where the supplier is actually going to charge us ten pounds fifty so let's edit this to match the purchase invoice hit save and then mark the invoice is received these two tick boxes on the right are only going to affect your price lists for the next purchase order it doesn't make any difference to your accounting so now the invoice has been received against the purchase order in the previous example where the amounts matched that would simply have moved the balance from stock received not invoiced to accounts payable or aged creditors which means you now owe your supplier for the stock but in this scenario because the value is changed something different has happened let's go and have a look at the general ledger where we can see that we now owe the supplier ten fifty which was the total on that purchase invoice but we've got the difference of fifty pence that's gone directly to the cost of sales account and that's the cost of sales account that's set on the product the balance that we put on to the stock receive not invoice of ten pounds has been removed which we can see on the balance sheet so here we've got ten pounds on stock or inventory and ten fifty on the creditors control account the fifty pence is gone direct to the profit and loss report has a fifty pence cost of goods sold when we laid to ship that hub to a customer we'll see a 10 pound cost of sales entry come in here bringing the total to ten pound 50 which is what we actually paid for the goods this means that if you receive purchase invoices at a different value from receiving the inventory until you sell all that inventory you might have a small variance on your cost of sales account and that's why it's important to receive your inventory at a price that most accurately represents what you're going to be invoiced for to finish it all off we're going shipped an invoice the sale so here's the sales order for one Cannondale hub we're going to sell it at 40 pounds and don't forget the current inventory value is 10 pounds so let's fulfill and markers shipped which creates a Goods out of shipment accounting entry and then we'll invoice it which creates a sales invoice entry so let's go to the general ledger where we can see these two here's that cost of goods sold and here's the sales invoice which is going to go against the debtors control account or accounts receivable because he's not yet actually paid for it let's go to the profit and loss report where we can see the sales revenue of 40 pounds and the cost of sale has gone up to 10 pound 50 on the balance sheet will now see that the customer owes us 40 pounds and we owe our supplier 10 pound 50 so the process I just shown you is where cost of sales accounting is turned on and that's by far and away the most common method because it records the cost of sale for every single shipment and likewise the increase in asset every time you receive inventory with cost of sales accounting every time you receive goods your asset increases which is why the account code on the purchase order shows your asset code and you can't change it that comes from the product with cost of sales accounting off which is what we sometimes call periodic accounting you'll see that the account code for even stock tracked items is actually a 5,000 code or a cost of sales account that's because brightful does not make any inventory accounting transactions for goods in and goods out when cost of sales accounting is turned off the first accounting transaction is only made when you receive the invoice against the purchase order and the entire value of that purchase order goes straight to your cost of sales account with periodic accounting in other words cost of sales accounting turned off you need to make opening and closing accounting transactions to record the value of inventory you've sold during that month for more detailed information on that have a look at the cost of sales accounting video and that takes us to the end of the video where we're looking at accounting for purchase orders