Unrealised profit (Q1, June 2012)

Because both the receivables and the payables are correct in each of the company’s records. When we add those across, of course we eliminate the intra-group balances.

But when it comes to inventory, the pup is included within the cost price so far as the buying company is concerned.

In the UK, all those years ago when I used to teach book-keeping, it was not unusual to say that “inventory is its own double entry”. That simply meant that if we increased inventory on the Balance Sheet, we also increased inventory in the Income Statement.

When eliminating the pup, the opposite effect still supports the double entry. We decrease inventory on the Balance Sheet and reduce closing inventory in the cost of sales calculation. The Balance Sheet adjustment is easy – simply reduce the value of inventory and therefore the asset “side”.

The reduction of closing inventory in the cos calculation has the effect of increasing cost of sales and therefore reducing the profit.

So, calculate the pup, deduct it from closing inventory on the Balance Sheet and increase the cost of sales, thereby reducing profits

Pup has different meanings depending where you are in the World. For example, I believe it means “kiss” in Romania.

However, for the purposes of F7 and P2, pup means “Provision for Unrealised Profit”