How Inventory flows through the system

Step 1: Purchase Order

The first step is getting Inventory into the system. This is normally done with a Purchase Order. As you purchase equipment, a couple of things happen.

First the Purchase Order is entered into the system, and faxed or sent electronically to the vendor. Once the equipment is delivered, the user will mark the Item received and post the Purchase Order. When the Purchase Order is posted, the item(s) are added to the Inventory by increasing the Onhand quantity.

At the same time that the item was shipped from the Vendor, they unfortunately, send an Invoice as well. As the user enters the Payables Invoice into the system, they indicate what the Invoice was for, which in this case is equipment. As the user refers to the Purchase Order, the Ledger Inventory Account number will be popped in, or entered by the user. When the Payables Invoice is posted, the Ledger Inventory account is increased (credited) by the amount of the equipment purchase, and your Ledger Payables account is increased (debited) by the same amount.

In this partnership, the Inventory Onhand value is increased at the same time (or within a day or two) that the Ledger Inventory value is increased.

Step 2: Orders (Medical, POS and Distributor Orders)

When the referral source calls with a request, the user will enter an Order into the system. Once delivery is made, the user will mark the item(s) as having been delivered. As the order is posted, the item(s) are removed from Inventory by decreasing the Onhand quantity. And at the same time, journals are created to reduce the Ledger Inventory account (credit) and increase (debit) the Ledger Cost-of-Good-Sold (COGS) account.

Step 3: Recurring Rental Orders

A Rental Orders works the same way that an Order for purchase would, with a couple of exceptions. When a rental order is marked delivered and posted, the system decreases the Onhand quantity, but not the Ledger Inventory account. The company stills owns the equipment even though it is rented by the customer. So we want to recognize that we no longer have it available for other uses, but it is still owned by, and an asset of the company.

However, once a rental item passes the capped rental period, the title to the equipment passes to the customer. The user will mark the item converted-to-purchase and ownership of the equipment will be passed from the company to the customer. At this time, usually the 13th or 36th month, the system will not reduce the Onhand quantity again, as it has already done so when the item was delivered. But journals will be created to reduce the Ledger Inventory account (credit) and increase (debit) the Ledger Cost-of-Good-Sold (COGS) account. In doing this, we recognize that we no longer own the equipment.

Note: The amount by which the Onhand value changes when sold (or converted to sale) depends on whether the item is Tracked. A Tracked item will change the Onhand value by the book value, Book Value being the Purchase Amount minus any depreciation taken on the item. But a Nontracked item will change the Onhand value by the Standard Cost.