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Hi Sir, I don’t really understand why COGS and Sales are deducted the same amount when calculating the Group COGS.
Let’s consider this example: Sub sell goods to Parent at COGS =1600, Sales = 2000. At the end of month, 30% goods are unsold.
– When Sub sell goods to Parent:
+ In Sub account: COGS increase= 1600
Sales increase = 2000
Profit increase = 400
+ In Parent account: Inventory = 2000
– When Parent sell goods (in my knowledge): COGS increase = 70%*2000 = 1400
– Unrealized profit = 30%*400 =120–> Using double entry:
Dr Revenue = 2000
Cr COGS = 2000
Dr COGS = 120
Cr inventory = 120
Netting-off, we have COGS decrease by 1880
And in this case, Group COGS = 1600+1400-1880 = 1120I understand that in 1880 deduction, there is a 1600 deduction of COGS of Sub, a increase of 120 due to a decrease in closing Inv balance of Parent. But I cannot explain for the remaining balance.
Can you kindly explain this to me as well.Thank you for your time and have a good day!!!
When one company sells to another company, the amount of the invoice is recorded as sales by the selling company, The buying company will be recording the same amount (i.e. the amount of the invoice) as purchases.
Given that they were sales within the group, the total sales and total purchases both need to be reduced by the same amount.
Have you not watched my free lectures on this where this is all explained? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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