I get asked all the time about reconciling the accrued drop ship account. In order to explain how to reconcile this account, I thought I would detail how the accrued drop ship account is utilized in Dynamics GP. Once you have a basic understanding of how the drop ship process works, you will realize that the account reconciliation really isn’t that complicated.
In general, the accrued drop ship account is used similarly to the accrued payables account in the standard purchasing process. Always set up a separate account for tracking drop ship transactions. There are many companies that use the accrued accounts payable (aka accrued purchases) account as the drop ship account. This isn’t recommended, since it makes it very difficult to reconcile the subsidiary ledger to the GL when combining both transaction types in the same account. I have also seen drop ship transactions flow through cost of goods sold accounts. Again, this isn’t optimal since it is virtually impossible to reconcile and find drop ship errors when drop ship transactions are co-mingled with a large volume of cost transactions.
Distributions for this process come from the preset item accounts. Items must be set up with the correct accounts for this to work properly.
Reconciling the Accrued Drop Ship Account
The accrued drop ship account balance should tie to the difference between Open Drop Ship Purchase Order Items and Open Drop Ship Sales Line items:
Accrued Drop Ship GL Amount = Open Drop Ship PO Line Items – Open Drop Ship Sales Line Items
Note: For all the former math majors…it is really the absolute value of the Open PO Lines and Open Sales Lines. Assume that the values in each list are positive when making the calculation.
The example below will show how the accrued drop ship account is used by illustrating a basic drop ship purchase order that is created from a drop ship sales order line item. The two areas that need to be tracked in this example are the GL Distributions and the amounts on the Open Drop Ship PO Line Items and Open Drop Ship Sales Line Items. Create SmartLists for the Open PO and Sales Line Item amounts using the parameters below. You can make combined lists using SmartList Builder if that is available to you.
Open Purchase Order Drop Ship Line Items
Open Sales Order Drop Ship Line Items
To test, enter a Sales Order and check the drop ship line item option for an item with a cost of $95 and a sales price of $200. Then, generate a linked drop ship Purchase Order from the Sales Order.
At this point, note that when the line item SmartLists are run there will be an open line item in each Smartlist, and the difference between the two line items should be zero. Your GL balance will also be zero.
The following steps will create the distributions below as the process is completed:
Enter/Match the Purchase Order item upon receipt of vendor invoice. The line item will disappear from the PO line Smartlist. At this point, the accrued drop ship account will have a debit balance of $95. The GL now ties to the difference between the line item SmartLists at $95.
Transfer the Sales Order to an Invoice and Post. The distributions that appear when the invoice is generated are not the same as when you post. If you review the distributions on the invoice prior to posting only Accounts Receivable and Sales will appear. When you post, the additional distributions for Cost of Sales and Accrued Drop Ship will be entered automatically from the preset item accounts. At this point, you will see that the Accrued Drop Ship account goes to zero, and your SmartLists will also show no open items.
A few of the reasons that the Accrued Drop Ship account will be out of balance are:
The PO was not created directly from the Sales Order. This can result in cost discrepancies. It is a recommended practice to always link drop ship Sales Orders and Purchase Orders.
The cost on the Sales Order uses the current cost. Until the PO is invoiced, the costs may be different. This should be apparent in your SmartLists.
Timing of the invoicing of the Purchase Order and posting of the Sales Invoice. You are not allowed to post a linked Sales Invoice without first entering the vendor invoice for the Purchase Order. However, you may use Shipment Notification to get around this. If you do, the costs on the sales invoice may differ from the purchase order cost when the actual vendor invoice you receive comes in with a different item cost than what was expected.
As you can see, reconciling drop ship accounts is fairly straightforward. For environments with a large volume of drop ship transactions, we've developed custom SSRS reports that will automate the reconcile.
If you're interested in getting your hands on one of these SSRS reports, please feel free to reach out to us!