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Accounting question(s)?
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Jack De'alek
Shattered Earth Industries
#1 - 2014-08-12 22:37:37 UTC
So this is not really a market related question, but we all know you smart financial guys hang out here.

I've been manufacturing for some time, and have recently ramped up production, and have begun attempting to figure out proper bookkeeping. (Prior, i've just calculated if things were profitable and built, and done very well for myself.) I've got a handle on the basics, but my question pertains to the general ledger. I am using GNUCash software, if that is of any consequence.

When I buy raw materials, I decrease my asset account 'cash on hand' and increase my asset account 'raw material'. This is all fine and good and does what it is supposed to do. My wallet balances and station inventory reflect what the general ledger suggests. I then decrease cash on hand and increase expense accounts for job installations, taxes and other relevant things. My problem comes when i try to enter sales of goods on the market.

Regardless of what I do, when I try to account for selling of goods by decreasing inventory, i'm left with an imbalance of funds. Ideally, I think that I want the income account 'sales' to reflect the sale and that money should be seen as an increase in 'cash on hand', while at the same time decreasing asset account 'raw material'. The problem of course is that this is double entry, and I'm unsure of how to decrease the inventory account while the sale is reflected in income and the cash on hand increases appropriately.

I'm not entirely dense, and realize there needs to be another transaction to balance the decrease of inventory, but where, or how would I show this? If I haven't made a complete ass of myself yet, and you can make sense of my question, some insight would be appreciated.

Thanks in advance.
Ace Merrill
Kador Defence Initiative
#2 - 2014-08-13 05:37:09 UTC
Welcome to the world of accounting and double entry bookkeeping.

Effectively the system you are talking about at a basic level should ideally run as follows:


Purchasing Raw Material as Stock:

Debit: Stock X
Credit: Cash (X)

(That's increase stock, decrease cash).

When you sell products:

Debit: Cash Y
Credit: Sales (Y)

(That's increase cash and recording a sale)

When we talk about double entry bookkieeping, we use Debit (Dr) and Credit (Cr) balances. On the Balance Sheet (ie your record of assets and liabilities) Debits are Assets, Credits are liabilities. So in your first transaction you trade one asset (cash) for another (mineral stock). On the Profit & Loss Account (or more simply Income & Expenditure) Debits are Expenses and Credit are Incomes.

When you record the sale, you are increasing your asset (cash) while recording the income (sales).

So at this stage, you've recorded your income from selling the goods, but not the cost, as you rightly point out.

To do this, you need to reduce your assets (mineral stock) and record the expense:

Debit: Cost of Sales Z
Credit: Stock (Z)

In this manner, you now have totals as follows:


Assets:

Cash = Y (From sales) less X (From buying Stock)
Stock = X (From Purchase) less Z (From Sales)

Income:
Sales = Y
Costs = (Z)

In this way the difference between Sales value and costs value is your profit (Yay!).

It is worth bearing in mind that this is a very simplified method of measuring your profit, you may want to think about a few aspects when working out what your profit really is.

1. How much did the factory cost at the station? (That's a cost you want to make sure your price covers too).
2. How much did the Blueprint cost originally? (Are you looking to offset the cost of setting up your business through sales or do you consider the Blueprint to keep its value because you could sell it again if you stop, if you do sell it after you stop will you get less isk than it cost you (ie it as depreciated)
3. How much did the Blueprint cost to research?
4. How much are the fees on your sales from stations? (That's a cost you want to make sure your price covers too).

There are a lot of ways to go into greater levels of detail in accounting in EVE (or any business), but those more complex examples can be studied in time.

The key is simply this:

Are you reflecting every cost before working out what price is profitable? If you don't, ultimately over time your cash will go down not up.

There's a lot of enjoyment (for some) in running their EVE operations as businesses and it can be a great lesson in accounting, how businesses measure success and economics. It's not for everyone, but I would definitely recommend it as at least a thought exercise for everyone in EVE because it helps understand pricing and getting the most isk for your time in game.

One of the biggest issues is the trap a lot of miners fall into - that minerals are free if you mine them. They're not, they cost time, time that could have been spent earning income elsewhere - even more so when you then make them in to a good for sale - if you charge less than the value you could earn from selling the minerals raw, then something is going wrong!
Magnu Stormhawk
#3 - 2014-08-13 08:29:45 UTC
If you don't have a sold understanding of double entry bookkeeping then I can't see that attempting to use a RL accounting software tool to monitor your finances is an optimal use of your time (unless you are attempting to learn bookkeeping and accounting this way). That said, accounting for production in eve is not easy due to the mechanics of the game and I dont think any third party tools do it particularly well.

The post above sets out well the steps you need to take, but your main problem here is the cost of sales figure. In order to reduce your stock and release the purchase cost to the P&L you need to know what that cost is. How are you going to determine the actual cost of an item that you produced? It's a lot of work unless you cut corners, and if you are cutting corners you may as well just use a more simplistic approach to accounting. To do it right you would probably need to look at the item you sold, then look at the material requirements, then look at what your cost for each of those items were, use a suitable basis like FIFO or average cost, and calculate it that way. If you don't do it that way then you will end up with imbalances somewhere along the line. This is roughly how RL manufacturing operations are accounted for.

A simpler version would be to record all of your sales and inventory purchases as you have been doing, and then at a point in time (eg monthly) value your stock and adjust it as appropriate, posting the movement to cost of sales, meaning that the purchase cost hits the P&L in one lump rather than per item. It's not quite as accurate but the difference is only timing, and it would be dramatically less work.
Abidal Trekt
Caldari Provisions
Caldari State
#4 - 2014-08-14 00:22:42 UTC
Don't be discouraged by the Cost of Sales figure. I use average cost because it is easier to calculate and there is no convincing argument I know of for FIFO vs average cost. Just don't use LIFO...

Don't cut corners and use a simple system. Take the time to build a robust one and utilize the API as much as possible to automate it. I wasted so much time building a system similar to Magu's last paragraph and with lots of manual entries. The only thing you will actually learn from it is "that you are profiting about this much", which you would have a sense of anyway.
Jack De'alek
Shattered Earth Industries
#5 - 2014-08-14 04:04:04 UTC
Thanks guys for the replies.

Ace, your reply was exceptionally well written and easy to follow. As far as the other points you raised, I already have installations, market taxes, broker fees, research fees and the like accounted for. Opportunity costs are always accounted for as well.

Magnu, I am indeed using this as a means to teach myself. I'm a small business owner RL (contractor), and over the course of this year the demand for my services has increased to the point that i'm going to have to start hiring apprentices, and that means payroll, and bookkeeping.

My spreadsheets already calculate mineral costs at market price, so let me pose another question/scenario.

If i buy materials at x cost, I'm valuing that asset at purchase cost.
If I start a job 3 days later, and that same mineral value has decreased, I would contend that the money already being spent, the cost of goods (speaking strictly of materials) would remain x.
If the mineral value has risen though, It makes sense to me to debit cost of goods at the increased value at the time of installation, given the opportunity cost associated with the value increase. Am I just way off base here? To be fair I haven't read up on the acronyms you guys are tossing around, so perhaps this is already one of the ways of accounting.

Anyhow, i'll go read up on some of the things mentioned here, and thanks again.
Magnu Stormhawk
#6 - 2014-08-14 08:29:45 UTC
Jack De'alek wrote:

If i buy materials at x cost, I'm valuing that asset at purchase cost.
If I start a job 3 days later, and that same mineral value has decreased, I would contend that the money already being spent, the cost of goods (speaking strictly of materials) would remain x.
If the mineral value has risen though, It makes sense to me to debit cost of goods at the increased value at the time of installation, given the opportunity cost associated with the value increase. Am I just way off base here? To be fair I haven't read up on the acronyms you guys are tossing around, so perhaps this is already one of the ways of accounting.



Under normal circumstances you would value stock at the lower of cost and net realiseable value.

This means that if the value goes up, meaning you could actually realise profit by just selling the minerals, you still maintain it at cost. The profit comes out when you sell (which in theory would be at a higher value than previously due to the material cost going up).

If the value goes down then you have actually made a loss before you have made anything. IRL, if your stock isnt worth what you paid for it you should adjust the value by writing off the difference. I wouldnt recommend doing this for eve accounting. If you continue to use purchase price, then the loss will still come out on sale, in the same way as above, because the sales price will be lower due to lower material costs. You might just have a lower profit margin, you might have a loss.

EVE market prices shift quite a lot so it is always going to be the case that your materials are either higher or lower value than your original purchase price. In some cases the material cost will go up but if there is a lot of finished product supply then the sales price wont react as quickly to the shift in material prices. Sticking to cost value for stock is sensible and your profits will be reported fairly accurately.
Bayonnefrog
Blueprint Mania
#7 - 2014-08-15 13:56:23 UTC
Ace Merrill wrote:
Welcome to the world of accounting and double entry bookkeeping.

Effectively the system you are talking about at a basic level should ideally run as follows:


Purchasing Raw Material as Stock:

Debit: Stock X
Credit: Cash (X)

(That's increase stock, decrease cash).

When you sell products:

Debit: Cash Y
Credit: Sales (Y)

(That's increase cash and recording a sale)

When we talk about double entry bookkieeping, we use Debit (Dr) and Credit (Cr) balances. On the Balance Sheet (ie your record of assets and liabilities) Debits are Assets, Credits are liabilities. So in your first transaction you trade one asset (cash) for another (mineral stock). On the Profit & Loss Account (or more simply Income & Expenditure) Debits are Expenses and Credit are Incomes.

When you record the sale, you are increasing your asset (cash) while recording the income (sales).

So at this stage, you've recorded your income from selling the goods, but not the cost, as you rightly point out.

To do this, you need to reduce your assets (mineral stock) and record the expense:

Debit: Cost of Sales Z
Credit: Stock (Z)

In this manner, you now have totals as follows:


Assets:

Cash = Y (From sales) less X (From buying Stock)
Stock = X (From Purchase) less Z (From Sales)

Income:
Sales = Y
Costs = (Z)

In this way the difference between Sales value and costs value is your profit (Yay!).

It is worth bearing in mind that this is a very simplified method of measuring your profit, you may want to think about a few aspects when working out what your profit really is.

1. How much did the factory cost at the station? (That's a cost you want to make sure your price covers too).
2. How much did the Blueprint cost originally? (Are you looking to offset the cost of setting up your business through sales or do you consider the Blueprint to keep its value because you could sell it again if you stop, if you do sell it after you stop will you get less isk than it cost you (ie it as depreciated)
3. How much did the Blueprint cost to research?
4. How much are the fees on your sales from stations? (That's a cost you want to make sure your price covers too).

There are a lot of ways to go into greater levels of detail in accounting in EVE (or any business), but those more complex examples can be studied in time.

The key is simply this:

Are you reflecting every cost before working out what price is profitable? If you don't, ultimately over time your cash will go down not up.

There's a lot of enjoyment (for some) in running their EVE operations as businesses and it can be a great lesson in accounting, how businesses measure success and economics. It's not for everyone, but I would definitely recommend it as at least a thought exercise for everyone in EVE because it helps understand pricing and getting the most isk for your time in game.

One of the biggest issues is the trap a lot of miners fall into - that minerals are free if you mine them. They're not, they cost time, time that could have been spent earning income elsewhere - even more so when you then make them in to a good for sale - if you charge less than the value you could earn from selling the minerals raw, then something is going wrong!


lolz at this guy ^

You need to teach him Cost not Financial accounting lmao
Ace Merrill
Kador Defence Initiative
#8 - 2014-08-15 16:10:02 UTC
Both cost and financial accounting have their place, but I would think that the financial accounting example given met the question in a simple and understandable way. Other accounting methods can be great for getting in to the detailed causes of variations in cost or even the revaluation discussed further above, but basic double entry is always the fundamental building block to start from.

Happy to discuss further with anyone - Qualified accountant with 12 years experience for my sins. Oops
Adunh Slavy
#9 - 2014-08-15 16:35:42 UTC
Q: What's the difference between an accountant and an economist?
A: Opportunity cost

Q: What is the opportunity cost of hiring an accountant?
A: Explaining opportunity cost to an accountant.

Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves.  - William Pitt
Tinu Moorhsum
Random Events
#10 - 2014-08-29 15:50:23 UTC
Jack De'alek wrote:


Thanks in advance.


Why are earth are you putting effort into this?

T-
Otto3d
Societas Imperialis Sceptri Coronaeque
Khimi Harar
#11 - 2014-09-01 15:01:57 UTC
This tool will help you greatly (saves a lot of work): http://eve.basicaware.de/evewalletaware/index.html

And then you have all the skills and standings that effect things aswell, so keep that in mind too.

EVElopedia < add this to your sig to show u WANT it back
Croda UK
Ironforge Commerce Guild
#12 - 2014-09-03 02:44:22 UTC
Raw materials and Finished Goods sit outside the normal double entry accounting.

you have 120m ISK

you buy raw materials for 100m ISK:

Dr Purchases (in the P&L [Profit & Loss account]) 100m
Cr Cash (on the balance sheet) 100m

Dr Stock (on the balance sheet) 100m
Cr Stock (in the P&L) 100m

so far, no profit has been made, your wealth remains 120m (100m raw materials + 20m ISK)


you convert the raw materials into the finished items for sale . . . . . to keep things simple lets assume the costs of manufacture were nil


you then sell the items for 115m ISK (after costs for fees and taxes).

Dr Cash (on the balance sheet) 115m
Cr Sales (in the P&L) 100m

Dr Stock (in the P&L) 100m
Cr Stock (on the balance sheet) 100m


Net effect:

Sales 115m
less Purchases 100m
gives profits of 15m

ISK in hand is 135m (115m sales + 20m ISK in hand)

i.e. the original 120m + 15m profit


. . . . . and to really bore the non-accountants, the reason you get so much stock fraud is that whatever number you chose for the year-end stock does not matter, the Accounts will still balance!

author of the blog marketsforisk discussing making ISK in Eve Online.