To breakdown the calculation of landed cost in NetSuite:
- The landed Cost feature enables users to associate and capitalize the charges they incur upon purchase to the item cost. In an Item Receipt where landed cost has been allocated, it is assumed that the landed cost needs to be a part of the cost of the Inventory Item. In other words, the landed cost expense transaction [Item Receipt] is credited with the landed cost account and debited with the Inventory GL account. Inventory is a current asset and hence an increase in inventory value results in debit. The corresponding credit goes to the landed cost COGS account to signify that the landed cost has been added to the inventory cost. This credit is shown as a deduction in the Income Statement. As a result, the landed cost is now included in the Inventory GL account which is an asset account in Balance Sheet.
- When the Items are sold to customers, in the Item Fulfilment transaction, the Inventory item value [which includes the previously added landed cost] is transferred to the COGS Product Cost account. Therefore the Balance Sheet asset value is deducted and the Income Statement COGS Product Cost GL value increases resulting in a debit amount.
- The landed costs are costs incurred at the time of purchase and receipt of the item. These costs are then transferred to the customers as shown in the above remarks. The landed costs incurred at the time of purchase can either be paid at that time itself or the payment may be made later on after gaining that costs from customers. Nevertheless, the payment [whether in the form of a Bill or Journal] will lead to the Landed cost COGS account being debited and the corresponding payment associated account credited. Hence, the landed cost COGS amount will be nullified. In other words, the landed cost COGS account is merely a hanging account for the purpose of storing the value until the costs are incurred and transferred to the relevant actual accounts.
To clarify the same, let’s take an example:
When an Item Receipt is created via Transfer Order for an inventory value of $100, the GL would debit the Inventory account by $100 and corresponding credit to the From Location’s Inventory in the Transit GL account. When landed cost [say, $10] is allocated to the Item Receipt, the GL would show a debit to the Inventory account by $10 and corresponding credit to the landed cost COGS account. Therefore the total GL impact would see an increase in Asset value by $110 and a decrease in landed cost account by $10. The $10 would be shown as a deduction in Income Statement and the $110 in the Asset account in Balance Sheet represent inventory. The Net Income would be increased by $10 in Income Statement. The Balance Sheet would show this $10 in Net Income on the Capital and Reserves section whereas the corresponding value has also been previously added in the inventory value on the Asset side, balancing the financial statement.
At the time of Item Fulfillment from Sales Order, the Inventory value of $110 would be credited [decreased] and the COGS Finished goods account would be debited [increased]. Thus the Income Statement at this point would show COGS finished goods at $110 and COGs landed cost at -$10. The Net Income is arrived at by deducting an inventory value of $100 [110-10 in COGS] from the Sales total which now includes the $110 Sales Order amount.
At the time of our payment of the landed cost, the landed cost COGS account will be debited by $10 and thereby an increase comes into the account in the Income Statement, thereby nullifying the account. Hence, the landed cost COGS account plays the role of a handling account only until the amount goes to the actual relevant GL accounts.