COGS fall into two broad categories:
- those that placed on bills (Dr A/P Cr COGS) e.g. a commission that is entered on a bill to be paid. The COGS amount could be captured on the Product/Service item's purchase price or entered as an amount on a bill/expense transaction directly
- those that draw down an inventory asset account balance e.g. upon invoicing/sale of Inventory items, where the prior purchase of those items built up the inventory asset account balance, and the sale concurrently recognizes the expense reducing the inventory asset balance
For the first scenario, you can create cost recognition schedules on the bill lines, just as you would for any prepaid expenses.
For the second scenario, typically in situations involving multi-element arrangements or when pre-sold item's are delivered across time, for "Inventory" type products you can have Flowrev configured (contact support) to seamlessly spread the COGS associated with that Product/Service item to follow the revenue recognition schedule.
For example, if the revenue from the sale of Inventory item(s) with a sale price of $1,200, and a purchase price of $600, is to be spread over a three month period at $400/mo., Flowrev can spread the Inventory item(s) purchase price at $200/mo. - proportionate to the associated revenue. You do this by simply creating and journaling the revenue schedule.
When the sale invoice is created, and the accounting system creates the below transaction journal:
| Dr A/R | $1,200 | Cr Revenue | $1,200 | upon invoice creation |
| Dr COGS | $600 | Cr Inventory asset | $600 | upon invoice creation |
Then the Flowrev schedule (only the invoice line's revenue schedule needs to be created) will enter the below journal entries:
| Dr Revenue | $1,200 | Cr Deferred Revenue | $1,200 | invoice month (Schedule defer) |
| Dr Deferred COGS | $600 | Cr COGS | $600 | invoice month (Schedule defer) |
| Dr Deferred Revenue | $400 | Cr Revenue | $400 | delivery month 1 (Schedule recognize) |
| Dr COGS | $200 | Cr Deferred COGS | $200 | delivery month 1 (Schedule recognize) |
| Dr Deferred Revenue | $400 | Cr Revenue | $400 | delivery month 2 (Schedule recognize) |
| Dr COGS | $200 | Cr Deferred COGS | $200 | delivery month 2 (Schedule recognize) |
| Dr Deferred Revenue | $400 | Cr Revenue | $400 | delivery month 3 (Schedule recognize) |
| Dr COGS | $200 | Cr Deferred COGS | $200 | delivery month 3 (Schedule recognize) |
Note: when the accounting system's transaction journal is directly to Deferred Revenue, Deferred COGS, the schedule defer element will be for $0 (which is not journaled).
The below is an example of the journal Flowrev will enter in invoice month:
