Understanding a backorder

Definition

A backorder is a customer order you have accepted even though you cannot ship it today. On the books, this is a waiting order, not revenue and not a negative inventory account.

The customer has said yes. You have said yes too, with a later ship date.

Nothing about that promise, by itself, puts cash or revenue on the statements. The inventory line is still short of the units this order needs.

When the goods arrive and you ship, the waiting order ends. That is when a normal sale can be recorded.

Where it shows up

Balance Sheet: Related to inventory that has not arrived yet.

P&L: Related to revenue that waits until the order ships.

See also: Stockout · Sales Order · Backlog

When you look at your Balance Sheet, a backorder does not appear as its own line. Inventory is still too low to fill the order, and you have not yet recorded the sale.

The profit and loss statement stays quiet until the goods go out. Confirming the order is not the same as earning the revenue.

The waiting order sits on an open-order list, not on the P&L. A packing slip and a shipment are what close it.

Cash does not move because a customer asked and you said later. Cash moves if they pay, or when you later collect after delivery.

How it works

A customer wants an item you do not have. You confirm the order anyway, with a date the stock should be in.

That confirmation is a sales order in a waiting status. It is not a shipping record, and it is not an invoice for goods you have not delivered.

You then order the missing units from a vendor. The purchase order is how stock will arrive; the backorder is the customer still waiting.

When the vendor delivers, you receive the goods into inventory. Accounts payable or cash moves with that receipt, not with the customer's original yes.

Only after you pick, pack, and ship to the customer does revenue belong on the P&L. The sale is earned at delivery, not on the day the order was taken.

If you recorded revenue at the moment of the backorder, this period's sales would be too high. Next period, when you finally ship, would be missing the sale it actually earned.

Until shipment, accounts receivable should not include that order either. There is not yet a bill for goods delivered.

Example

A florist takes a Monday order for a party centerpiece that needs stems the shop does not have. The wholesaler will deliver those stems on Tuesday.

The florist confirms the $120 centerpiece and writes it as a backorder. No revenue journal posts on Monday, because the flowers have not shipped.

Tuesday morning the stems arrive. They cost $40, due to the wholesaler:

Debit: Inventory $40

Credit: Accounts payable $40

Inventory goes up by $40. The customer order is still a backorder until the centerpiece leaves the shop.

Tuesday afternoon the florist builds the piece and delivers it. That is when the $120 sale can be recorded:

Debit: Cash $120

Credit: Revenue $120

Revenue hits the P&L on Tuesday, not on Monday. The $40 of stem cost leaves inventory as cost of goods sold when the piece goes out.

Common mix-ups

A backorder is not a stockout. A stockout is the empty shelf; a backorder is a customer who already ordered and is waiting.

A backorder is not earned revenue. Confirming the order does not put sales on the P&L if the goods have not shipped.

A backorder is not a purchase order. The purchase order goes to the vendor; the backorder is the customer's waiting order.

Related terms

• Stockout: Running out of an item customers want to buy.
• Sales Order: The internal record of a customer's confirmed order.
• Reorder Point: The stock level that triggers a new purchase order.
• Backlog: Signed work that has not yet been delivered or recognized as revenue.
• Inventory: Goods held for sale or used to produce goods for sale.
• Purchase Order: The document authorizing a purchase from a vendor at agreed terms.
• Revenue Recognition: The rules for deciding when earned revenue may be recorded.
• Packing Slip: The document listing what was shipped with an order.