Account for 3rd Party Landed Costs on Purchases

This article illustrates how to account for landed costs when being billed by a 3rd party vendor (i.e. a vendor other than who the inventory was purchased from.) As you may remember from your accounting classes, any cost incurred in bringing inventory from the vendor to the buyer is a landed cost. The goal here is to revalue the inventory to include the landed costs while paying both vendors the amounts you owe.

Here's a common scenario that we are addressing in this article:

  • Order and receive inventory from vendor A. This vendor invoices you for the inventory.
  • Inventory is delivered by vendor B. This vendor invoices you for the freight & handling.

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If you need instructions how to account for landed costs from the primary vendor, SEE THIS ARTICLE.

1. Enter a Voucher to pay the inventory Vendor

1.1. Add the landed cost to the inventory value

  1. Enter the Voucher Amount to be paid to the inventory Vendor just as you would under normal circumstances.
  2. Mark the items you want to pay for on the PO Line Items tab.
  3. In the Freight column you will account for the freight charges for each line item. You can also account for Other charges at the same time.
    • If the inventory is still in stock, these charges will be added to the value of the inventory.
    • If the inventory has already been sold, these charges will be added to Cost of Goods Sold.

You may notice there are fields for Freight and Other Charges directly above the PO Line Items area. Here's how to use those fields:

Freight

  • Freight costs are distributed based on weight. If your inventory items were received with a weight entered on the Product record or Purchase Order, the system can automatically distribute the freight charge to each line item.
  • Enter the freight amount in the Freight field and click Distribute to distribute the freight charge based on weight.
  • You can also manually calculate & enter how much of the freight should be distributed to each line item.

Other Costs

  • Other Costs are distributed based on quantity.
  • Enter the amount in the Other Charges field and click Distribute to distribute the charge based on quantity.
  • You can also manually calculate & enter how much of the "other costs" should be distributed to each line item.
Inventory Voucher - PO Line Items

1.2. Account for the 3rd party charges

Now we need to account for the freight cost that we added to the inventory value. We will do so on the General Ledger tab of the same Voucher.

You will need to have a holding account in order to clear these charges. This would typically be an expense account. The amount charged to this account on the inventory voucher will be cleared when we enter the freight voucher. For this example, I created an expense account called Third Party Charges.

  1. The amount of this "expense" needs to be a credit to go along with the other $22.50 worth of liability (credit) we've recorded in the Voucher Amount (payable to the inventory vendor).
  2. If the Amount Remaining To Distribute is $0.00 then click OK to save the Voucher.
Inventory Voucher - General Ledger
GL activity for the inventory voucher

Below you can see the GL Transactions for the inventory voucher.

  • Credit $10.00 - the amount entered to the Third Party Charges holding account on the General Ledger tab above.
    • This amount will be cleared when the freight voucher is entered.
  • Credit $22.50 - the amount of the payable owed to the inventory vendor.
    • This amount will be cleared when the inventory vendor is paid.
  • Debit $22.50 - the amount cleared from the Inventory Holding account.
    • This amount is clearing the Inventory Holding account that was credited when the inventory was received.
  • Debit $10.00 - the amount being added to the value of the received inventory.
    • This amount will be the CoGS when the inventory is sold.
GL Transactions - inventory voucher

2. Enter a Voucher to pay the freight Vendor

Above, we entered a voucher to pay for inventory while also adding a freight cost to the existing inventory value. We still need to pay the freight vendor so this necessitates another voucher.

  1. Enter the Voucher Amount that needs to be paid to the freight vendor. This should match the freight amount that was distributed on the inventory voucher.
  2. Go to the General Ledger tab and enter a charge using the same holding account you used in Step 2 (e.g. Third Party Charges).
  3. This time the $10 amount needs to be entered as a debit to offset the credit amount we charged earlier. Click OK to save.
Freight Voucher - General Ledger
GL activity for the freight voucher

Below you can see the GL Transactions for the freight voucher.

  • Debit $10.00 - the amount entered to the Third Party Charges account on the inventory voucher is being cleared here on the freight voucher.
  • Credit $10.00 - the amount of the payable owed to the freight vendor.
    • This amount will be cleared when the freight vendor is paid.
GL Transactions - inventory voucher