Orders that remain unfulfilled or unprocessed are considered backlogged orders. These incomplete orders represent unearned sales revenue that remain available for the company to earn. When managed effectively, the company’s backlog can ensure that customer demand is satisfied. When ineffectively managed, the backlog can result in a steady loss of revenue.
A company’s accounting information must identify the backlog’s value, cost and revenue. These entries display the cost of the backlog inventory, the cost required to produce the inventory and the gross profit of the backlogged inventory. In most cases, the revenue is subtracted from the cost of producing the items in order to generate the total gross profit, or potential gross profit, of the backlogged inventory.
It is important to monitor a company’s backlog. Backlog that remains unsold can depreciate, resulting in reduced and lost sales and reduced sales volume. Backlog ratios help determine the viability of the current backlog and forecast the company’s ability to keep up with the current demand. The sales backlog ratio is determined by dividing the total amount of backlogged orders by the total number of sales. The sales backlog can also be determined by comparing the average daily sales by the backlog. To achieve this ratio, the total backlog must be divided by the company’s annuals divided by 360 days (total backlog/ (annual sales/360 days).
Backlog that remains unsold also experiences depreciation. Depreciation is the gradual loss of the asset’s value. The depreciation reduces the potential revenue that can be earned when the backlog products or property are sold. The age of the backlog, as well as changes in the economy, customer demand and regulations can force backlog products to depreciate. The depreciation should be recorded and adjusted in the annual federal tax return.
Backlog accounting is especially important in manufacturing and production industries that produce products. The failure to control and monitor the backlog can result in too much or too little available inventory. Too much inventory can result in the loss of potential revenue while too little backlog can result in the inability to keep up with customer demand. It is important for the backlog to be assessed and counted regularly to ensure balance and avoid excess.