It happens in many companies that deal with inventory – they get the goods with a note, but no invoice. Usually an invoice is sent separately and a bit later on. However, during normal course of business and in most companies, you would expect to start selling the goods as soon as possible. But how can you do it with goods that the supplier has not yet sent the invoice for? You need a source document for every entry on your balance sheet and in this case for proper entry it’s missing.
Essentially you cannot leave those goods out of the balance sheet, because they are your company’s assets. So, to overcome this problem, you will recognize those items as goods held for sale (or materials etc) and on the other side of the balance sheet you take up a liability on a separate line called ‘Payables to suppliers (invoice not yet received)’. The entry looks something like this:
Dr Inventory
Cr Payables to suppliers (invoice not received)
Now when the invoice is received, you need to move the payable from this line to another, the proper one. The entry is as follows:
Dr Payables to suppliers (invoice not received)
Cr Payables to suppliers
When the entries are simple, so should be determining the amount payable for goods (and essentially the cost price of those goods on the balance sheet). It is done either with price listing agreed between the company and the supplier, a bidding or general price of the good (obtainable for public price lists of the supplier).
Do make sure you have all the inventory received with a note recognized on the balance sheet as soon as possible and also don’t forget to ensure that the account with ‘(invoice not received)’ is essentially always debited. The balance of this account should never be increasing constantly in time, but if anything may be fluctuating depending on the type and volume goods purchased.
Its it illegal not to pay for goods or services that was received but no invoice arrived? Is it best to ask for an invoice or statement from the vendor and pay accordingly. Or not ask for an invoice and write the amount off the books?
So you DR Payables (no invoice received) and CR Write-offs or some other creative GL #?
It is always best to ask for an invoice or get other form of documentation proving what you actually paid for.
You make the entry on to the accruals account to get your expenses to right period, but you don’t pay to the supplier until you’ve received an invoice.
Having no documentation for what you paid for means you cannot ask any taxes back from it and you may be accused of money-laundry. Keeping sourcedocuments for all accounting entries is a must.
So yes, it is illegal.
What if the the invoice is received in a foreign currency, different from the one used in the initial entry when the inventory was received? How is that normally handled?
So say for example inventory was received and the first entry (Dr Inventory/Cr Invoice not received) was booked in the company’s functional currency – JPY for example. Then say the invoice is received in EUR, do you book the second entry (Dr Invoice not received/Cr Payables to suppliers) in EUR and revalue it to JPY at month-end or how is this usually handled?
Thank you for the question.
First of all, accounting is always done in one currency, that is your company’s functional currency. You should not make entries in different currencies into your books.
If you’re trading in foreign currencies, they are translated into functional currency using the exchange rate effective at the date of the transaction. Balances nominated in foreign currencies at period end are to be revalued using the effective rate at the balance sheet date.
As a reply to your example I would say that the first entry is made in JPY using the JPY – EUR rate at the date and once the invoice is received, the entry is made onto the payables account as you point out, but using the effective rate at the date you accounted for the invoice. The difference, say you debit 100 off from the “Invoice not received”, but the “Payables to suppliers” should be 120, the difference 20 is debited to expenses as “Loss from currency exchange difference” OR if the goods are unsold, you increase the inventories instead (since the goods you purchased, cost more than you initially accounted for).
At balance sheet date you would revalue the payable again using the effective rate of the day and again account for either gains or losses from currency exchange differences. If the goods are unsold at the date as well, the loss or gain is accounted to income statement, there is no revaluing inventories then.
Hi
what if Supplier company is winded up and we are not in a position to receive the Invoice for the received goods and how will we treat these goods and will meet audit requirements.
Thank you!
Hi and thank you for the questions!
First off I would clarify whether it’s tax audit or financial audit. If it’s a tax audit, I would consult with the local legislation as to which kind of documents they’d want to see for the “purchase”. Obviously your hands are tied and obtaining an invoice is out of your control. A company going into bankruptcy or simply being closed may not be in the position to issue invoices. However, I would imagine that if there are other companies this company owns money to, they’d be in the position to come after the mentioned company’s clients which you currently are (not specifically after clients, but after any receivables potentially outstanding). There may be a point within the process you would still receive the invoice. I would suggest you find out the reasons for the closure and whether there’s still the chance you will still have to pay.
As for treating those goods I presume you mean “treating them in your accounts”. Generally speaking you should account them in their cost (Db Inventory and Cr Payable), however, since there isn’t a payable to be paid, one could argue that you got those goods free of charge and you don’t account for them per say (you take them into the inventory ledger, but with their cost price at zero). It’s the same as if you paid for 9 and you get 1 for free. You account for the cost of the 9 on the total of 10 received. Only in this case you got the goods free of charge (unless there was say transport expense, which then is the cost for the goods).
For financial audit purposes (and I would presume for tax audit as well), to prove this mentioned company sold / sent you the goods, to prove what you received and when and that the goods were really sent to you and so on, i.e. to prove ownership, it suffices if there’s at least a shipping document and preferably also a general agreement or contract in place setting the conditions of your trade with this mentioned company. If neither exist, should such a question arise, it may be difficult to prove you actually own those goods.
I hope this answered your questions.