Accounting For Inventory Under GAAP

Unless I am missing something, the title transfer is the key to recognizing the inventory item on your balance sheet. If you don't have title (or other agreement like a lease), you can't have an asset. Almost sounds like a consignment arrangement.

The entry when you receive the invoice is interesting.. I am not sure what your debit entry would be exactly... Inventory - not owned? Prepaid Inventory? It may be something you just address at key cutoff dates (audit periods) without having to really change your entire A/P Inventory process.

Good luck with that and love to hear others thoughts on the DR and CRs involved on the receipt of the invoice.

What you need to do is examine your Purchase Orders for the legal language you need depending on where you do business and the industry you are in.

If you are not using PO's then you are at the mercy of the vendor's terms.

If you are not using PO's then you unfortunately are probably not recording the liability on the date you take receipt of the goods.

Unless you have a contract to the contrary, the liability for payment occurs at the moment you indicate Receipt of Goods, regardless of invoice terms.

Think about it. If you were taken to court by the vendor, the judge would ask you, well they deliver the goods? Yes. Well, did your employees take delivery? Yes. Then you have legal liability for the goods.

You need to record the inventory on your books at the time you receive the goods.

Don't play games with the dates.

Payment terms usually do not determine title transfer - unless there are issues of collectability or the lack of a defined sales event.

Even in those scenarios it is better to handle the offset to inventory as a reserve given the velocity of inventory (how fast it can move through your system / their system) and the other financial impacts it can have (COGS, Production Use, etc).

Bob Scarborough