Edward Gutkowski, Chief Architect - RapidReconciler, Products
What is a direct shipment? In JD Edwards terminology, a direct shipment is defined as the process where you purchase materials from your supplier and ask them ship it directly to your customer, minus the goods ever showing up at your facility. The reason a transaction is mandatory is to send an invoice to your customer and have an open receipt ready to match to the supplier's invoice. Therefore, the SD/OD order pairing remains the default means to handle this. The purchase order, or "OD" is used for the payable and the sales order "SD" is used to generate the invoice and receivables.
Sounds simple enough, but wait ... what about the accounting that happens behind the scenes? How should that work? Let's follow the process in a bit more detail:
A direct ship order is entered authorizing the shipment to the customer. This is communicated to the supplier.
An "OD" PO is ready to be received
An "SD" SO is ready to be invoiced
The supplier then ships the goods directly to your customer and sends you the invoice.
You get the invoice and match it against the PO. This triggers a status bump to the sales order moving it to the invoice step.
Invoicing and sales update run generating the appropriate entries.
On the accounting side:
Receipt on the OD – Debit to "Inventory", Credit to RNV.
Shipment on the SD – Credit to "Inventory", Debit to COGS. (There are revenue and A/R entries as well).
Notice I put the "Inventory" account in quotations. More often than not, I see systems set up where this account is the same as the one used to hold perpetual inventory. This is not a recommended set up, even though it might seem to work. The secret to making reconciliation much easier is to use a dedicated clearing account, specifically for these transactions. Residual dollars may be left in the perpetual account making it much more difficult to reconcile if:
The receipt and shipment are not processed in the same period.
Changes in item costs are not updated equally on both sides.
Unbalanced changes are made to the orders.
A dedicated clearing account for direct shipments keeps any unwanted variance out of perpetual inventory and isolates them in a single account. A quick check of this account can indicate the need for an accrual, or that an order made need to be adjusted. It is an easy way to make things simpler during the period end close!
Happy reconciling!
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