Distribution companies buy goods and resell them for a profit, usually from business to business. Since distribution companies typically transfer a large amount of product in and out of their warehouses, it's important for them to accurately account for the purchase, inventory and sales process.

## Accounting for Purchases

Distribution companies usually maintain a purchasing staff that issues purchase orders to vendors for goods. Most businesses purchase inventory on credit and pay cash once they've received the goods. For example, say a distribution company issues a purchase order for \$500 of product. Once the company receives the goods, the accounting department will debit inventory for \$500 and credit accounts payable for \$500. Once the distribution company receives an invoice and decides to pay the bill, the accounting department will debit accounts payable for \$500 and credit cash for \$500.

## Maintaining Inventory

The distribution company typically maintains its inventory as an asset valued at cost. That means, if the company paid \$500, it will list \$500 of inventory on its balance sheet. However, generally accepted accounting principles require companies to value inventory at the lower of cost or market. If the company suspects that its inventory is devalued due to breakage or obsolescence, it should evaluate the inventory and mark down the value if necessary. For example, say the company determines that \$100 worth of inventory is spoiled. The accounting department debits loss on inventory for \$100 and credits the inventory asset account for \$100.

## Calculating Costs

Once the distribution company receives a purchase order, it will remove inventory from its warehouse and ship it to a customer. The company has a few different options when it comes to calculating the cost of goods it sold. It can use the weighted average cost of the inventory, the last in, first out method or the first in, first out method. Companies that use the "last in" method consider the most recently purchased inventory price to be the cost of inventory sold. Under "first in," the oldest inventory price is considered the cost of inventory sold. Under weighted average, the company uses the average cost of all inventory it currently holds.

## Recording Sales

After calculating the cost of goods the company sold, the accounting department will record the sale of product. Accounting needs to document both the flow of assets and the revenues and expenses from the transaction. For example, say the company sells one unit of inventory with a cost of \$100 to a customer for \$150. The accounting department debits cash for \$150, credits sales revenue for \$150, debits cost of goods sold for \$100, and credits the inventory account for \$100.