Pastel Physical Items or Service Items?
Physical items are tangible items that you either manufacture or purchase to resell to customers.
Service items do not fit this pattern. For example, accountants sell time. They charge accounting expertise per hour. Similarly, a service company sells maintenance contracts. Companies that sell physical items may also require service items such as delivery charges, postage, and so on.
Generally, physical items have the following characteristics:
· Pastel maintains a quantity on hand for these items. If there are insufficient quantities on hand to sell, Xpress can warn you or prevent you from selling the item, depending on whether you allow processing with negative quantities.
· You can purchase them, and therefore you can adjust their quantities.
· Each item has an average cost, which is determined by the purchase price and the quantity on hand.
Service items, on the other hand, have the following characteristics:
· Pastel does not maintain a quantity on hand for service items – there is always zero on hand. However, you can invoice an infinite number of service items. A good example of this is if you invoice consulting hours. Furthermore, you can obtain a history report of the quantity movement of service items.
· Since service items do not have quantities, you cannot use them in inventory journals nor can you reorder or see them in the Reorder report.
· You cannot purchase service items to bring in quantities or adjust their moving average cost. However, you can include service items in supplier invoices. You would use these, for example, to enter your supplier’s delivery charges.
· Service items may or may not have a cost. For example, a maintenance contract may not have a separately identifiable cost while delivery or consulting hours may have a cost. To cost a service, you enter the cost in the Last Unit cost field, which is in the Edit…Inventory…Item File menu option, in the Details tab.
Costs on service items are used in the following:
· On the sale of an item The cost price is used to calculate a gross profit. This is useful, for example, if you charge out consultants hours to a customer, and the consultant in turn charges you an hourly rate. Enter the hourly rate you pay to the consultant as the cost price, and the price you charge your customers as the selling price.
Note: You can change an item from a physical to a service item and vice versa. If you do, and your inventory integrates to the general ledger, you should process journals in the general ledger to correct the inventory accounts in terms of costs.
Service Items and Costs When Inventory Integrates to the General Ledger
If inventory integrates to the general ledger, you need to set up service items correctly before Xpress will allow you to enter costs for these items. The first thing you need to do is to create one or more inventory groups dedicated to only those service items that have a cost.
You do this in the Setup…Inventory menu option, in the Integration / Groups tab.
You must then ensure that the inventory and cost of sales accounts in these inventory groups belong to an income statement category.
However, you need to be careful of the accounts you use. There are two scenarios as follows – you can use the same (income statement) account in the group’s inventory and cost of sales columns OR different accounts in the group’s two columns:
· Tracking Costs for Service Items
An example will clarify how this works. Assume you provide delivery services and have created Delivery Expenses and Cost of Sales accounts. You should then use the latter as the group’s inventory account and the former as the group’s cost of sales account.
When a delivery is used, Pastel debits the Cost of Sales account and credits the Delivery Expense account with the cost of the service item which you entered on that item’s master file. The sales value of the item, as recorded on the invoice, will be credited to the sales account and debited to the customer’s account. When the payment comes through, you would debit the Delivery Expense account and credit the customer’s account. In effect, the Delivery Expense and the customer’s account would be zero while the Cost of Sales and of course the Sales account would reflect the sales value in the trial balance.
· Not Tracking Costs for Service Items
If you use the same account in the inventory group’s inventory and cost of sales accounts, no values are written to the general ledger. The cost will only be used to determine gross profit for sales analysis codes.