The store-keeper receives the goods supplied by the supplier, in case of small & medium sized organizations. So, no separate receiving department is there in this case & a copy of the purchase order is received by the store keeper, while in big concerns, the receiving department receives the same. The goods are inspected by the store keeper with reference to quality & quantity. However, separate receiving & inspection department are there in the big concerns. In this respect, the following is the routine work:
- Get the challans & invoices & unloading of the materials.
- Physical survey, regarding the number of packs, physical conditions outwardly shown etc. is made.
- The materials are unpacked, marked, physical verification of the quantity received is made with reference to the challan & the purchase order, any shortage, breakage or surplus is brought to the notice of the supplier.
- The quality of the material required to be checked with reference to the sample or grade. Sometimes inspection department, where there is such a separate department, performs laboratory testing & the report of the testing is prepared in triplicate- one copy is for the office copy, second copy is for the receiving department & the third is for the purchase department.
- The challan needs to be signed & a copy required to be returned to the supplier as acknowledgement of receipt.
- After all the above have been done, goods received note in five copies will be prepared by the receiving department, out of which the original is to be retained, & the others needs to be sent to the purchase department, the accounts department, the store-keeper (if the material is not received by him) & the department which is responsible for making purchase order.
The entries are made in the stores ledger on the basis of the goods received
note.
If the materials physically supplied are found less than the quantity
which is mentioned in the challan & the invoice or if some items have been rejected,
then in that case, the fact of such shortage or rejection needs to be noted in the
challan before a copy to the supplier is sent as acknowledgement of receipt. In respect
of value of such shortage or rejection, a debit note needs to be prepared, ©
of which should be sent to the supplier so that they can make similar adjustment of
value in their books. On the other hand, if the materials are found in excess, then
in such case, the fact must be noted in the challan & regarding the surplus, negotiation
needs to be made with the supplier. Necessary gate pass should be issued, if the surplus
materials are taken back by the supplier. However, in respect of value of surplus materials,
a credit note should be prepared, if the surplus materials are taken by the buyer.
The
value of invoice must include such value & in the
goods received note, such materials must be included
in the ‘net quantity received’ column.
(E) Invoice checking & passing the same for payment:-
In respect of the materials supplied by the supplier, invoice (i.e. bill) together with the challan is usually sent by the supplier along with the goods. With reference to purchase order, goods received note, inspection report, debit or credit card note, invoice is to be checked. In the purchase order, quantity ordered, rate, terms of delivery, terms of payment etc. are mentioned. Whether or not all the terms & conditions have been fulfilled, must be seen. Net quantity received are mentioned in the goods received note where as the quality of the material are approved by the inspection report. The quantity of short or excess supply is shown in the debit or credit notes. Confirmation of the invoice figures needs to be done with the goods actually received at the agreed rates. So, in respect of short or excess supply, inappropriate rate charged or wrong calculation, adjustment of the invoice price shall be required. Any violation of terms is to be taken up with the supplier for settlement of final claim & it involves penalty.
After the invoice is checked carefully on each of the above mentioned points, if an invoice is found correct, then to that effect, endorsement is made on the invoice & under the signature of purchase officer/manager, such invoice is passed on to the accounts department for payment.
When for any reason, any alteration needs to be made in the invoice, it should be altered & through the debit or credit note showing the reasons for alteration, supplier should be informed.
Constituents of Material Cost:
When materials are purchased, we do not pay for the materials only but sales tax, excise duty, octroi, freight, insurance etc. are also paid by us. Sometimes, the cost of packing or hire charge for packages is also paid by us. At the same time, trade & cash discounts are also enjoyed by us. The material cost therefore includes the following:
- Invoice Price: Invoice price is the price of materials which is calculated at the agreed rate subject to any deduction of trade discount.
- Excise duty, Sales tax, Octroi etc.: These are the levies which the government has made on production or sales. So the cost of materials purchased includes these.
- (c)Freight, Insurance etc.: Cost of materials includes the cost of bringing the materials from the supplier’s end when borne by the buyer. Thus, carriage inward & insurance cost on inward goods is included in the cost of materials.
- Packing Cost: If in addition to the invoice price, packing cost is also charged, cost of materials includes such cost. When in returnable packages which are charged to the buyer, materials are delivered & buyer is given credit at a lower rate of return, the difference between the rate charged & the rate credited is known as hire charges (or rental) & the same is included in the cost of materials.
- Cash Discount: When deductions are available in respect of invoice value, on the condition that payment must be made within the prescribed time, this is called cash discount. Thus, this is a reward for good financial management & hence has got nothing to do with the purchase. So, in order to ascertain the cost of materials, cash discount should not be deducted.
Problem: A purchase order is sent by A ltd to B ltd, of which the terms are as below:
Quantity to be supplied is 10000 litres of oil @ $ 10 per litre.
Trade discount@ 20% & Cash discount @ 15% (terms 15 days)
Sales tax chargeable @ 10% & Octroi @ $ 10 per 100 litres
Freight charged is $ 600 for the entire consignment.
Insurance on the goods carried is $ 100.
Delivery in containers of 100 litres is within 15 days, each container is chargeable @ $10, but credit is allowed $ 5 on return within a month.
As per terms & conditions, the materials ordered were delivered & payment was made on 12th day & on the 26th day from the date of delivery, the containers were returned.
Calculate the cost of materials in total & per litre.
Solution: Total cost of 10000 litres ($) Cost per litre ($)
Agreed Price 100000 10.00
Less: Trade discount @ 20% 20000 2.00
80000 8.00
Add: Sales Tax @ 10% 8000 0.80
Octroi
@ $ 10 per 100 litres 1000 0.10
89000 8.90
Add: Freight 600 0.06
Insurance 100 0.01
89700
8.97
Rental of Packages 10000 * (10-5) 500 0.05
100
90200 9.02
Note: Cash discount should not be deducted from the cost of materials.
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- Accounting for Materials
- ABC System/Selective Control System
- Average Cost Methods
- Centralized vs Decentralized Purchase
- Comparison of FIFO& LIFO methods, Next-in-First out (NIFO) Method
- Economic order Quantity (EOQ)
- General Accounting Entries for Materials
- Levels of Stock
- Material Control
- Materials-Introduction
- Materials-Pricing the Issue
- Periodic Simple Average Method, Periodic Weighted Average Method
- Perpetual Inventory system
- Purchase Procedure
- Standard Price Method
- Stock Valuation
- Types of Stores
