Accrued Inventory Payable (i.e. Inventory Holding): How does it work?

Accrued Inventory Payable (also known as Inventory Holding) is a holding account that supports Purchase Order receipts that have not yet been invoiced by the Vendor. The process allows you to reconcile your PO receipts against the Vendor's invoice. As a Liability it carries a nominal Credit balance.

When you receive a shipment of Inventory (i.e. PO Line Items), your sales team wants access to those items so they can be sold. The Vendor's invoice is typically not received at the exact time of the Inventory shipment -- this means the Accounts Payable department has not yet recorded an actual Liability for the Purchase. In order to balance the value of Inventory that has been received [but not yet billed for] AV makes an entry to a holding account called Accrued Inventory Payable. When a Voucher is entered for the Vendor invoice, the Accrued Inventory Payable account is relieved (debit) and Accounts Payable is credited. This action records the liability that you'll eventually pay to your Vendor.

The accounting look like this:

  1. Purchase Order Receipt (aka Purchase Event):
    • Debit to Inventory Asset at the PO Cost
    • Credit to Accrued Inventory Payable at the PO Cost
  2. AP Voucher (aka Vendor Invoice):
    • Debit to Accrued Inventory Payable at the PO Cost (netting this account to $0 for the PO receipt).
    • Credit to Accounts Payable for the Voucher amount (or a credit to the GL Account associated with any selected alternate Payment Type)
    • Optional: Additional Debit to Inventory Asset or Cost of Sales for any change in the Vendor's price or to record Landed Costs

So you can see that the Accrued Inventory Payable account simply holds the value of the received PO items until the Vendor's invoice is entered.

Maybe you're more of a visual learner. If so, here's a flowchart that illustrates the Purchasing & A/P process from start to finish.

Note the journal entries that are created at each step of the process.