Added "Negative inventory clearing" account

[lubos]

The latest version (25.10.24) is adding a Negative inventory clearing account.

Previously, if you were looking at your financial statements and your closing Qty owned was zero or negative and total cost was not zero, Manager would make an automatic entry to your Inventory - cost account on the profit & loss statement.

For example see this topic:

Incorrect Cost of Goods Amount

Hi, I would like to ask regarding cost of goods from inventory. Suddenly my cost of goods become bigger than the revenue. the cost of goods appear as follow. [image] I am not sure why there are items appear without edit and view. i have noticed that as follow: Item A, purchase price of $20. we buy 4pcs which is amounted to $80. we sell it 1pc per month. the cost of goods only appear selling 1. with cost of goods $20. then the cost of goods appear again showing the item with total $80 (bigg…

It turns out this wasn’t an intuitive approach because upon drilling down to the Inventory - cost account, it wouldn’t be obvious where these entries are coming from. To solve this issue, I’ve added a new Negative inventory clearing account which will ensure we are not mixing up regular cost of goods sold transactions with negative inventory adjustments.

Let me demonstrate how it works.

Let’s say we have purchased 5 books and sold 6 books.

The resulting Qty owned will be -1.

And here is the ledger for Total cost.

We have purchased these books for $50 each and since we sold one extra, our inventory value will be negative $50.

Manager will make an automatic entry to debit $50 so that the balance ends up as $0 (we do not want to show a negative inventory value on the balance sheet).

Previously, this $50 would be automatically posted to the Inventory - cost account, creating confusion. So instead of mixing regular cost of goods sold transactions and these negative inventory adjustments, we will separate it.

When you click on Inventory - cost, you will see:

And when you click on Negative inventory clearing, you will see:

Drilling down into the Negative inventory clearing account is presented differently so we can see more context. Also, Qty owned and Total cost are clickable on this screen so you are not at a dead end and can examine further what’s behind these figures.

[shahabb]

Why not allow the item value to go negative instead of making it to zero with an adjusting entry when the qty goes negative?

This approach would make the BS and P&L more accurate, avoiding inflated profits. The only potential difference would be if the purchase price of the item changes on the next purchase, but even then, the impact would be much smaller compared to completely ignoring the cost of the negative quantity.

[lubos]

@shahabb

Why not allow the item value to go negative instead of making it to zero with an adjusting entry when the qty goes negative? This approach would make the BS and P&L more accurate, avoiding inflated profits.

I don’t see it as a matter of inflating profit. Negative inventory is inflating Inventory - cost expense but then Negative inventory clearing offsets some of that so your overall profit is accurate.

Here is my book example:

If we wouldn’t have Negative inventory clearing, then your net profit would be only $180.

After spending on books $250 and selling them for $480, it’s more accurate to say your profit is $230. This would be typically your tax assessable income too.

Also, it’s good for visibility. If you have no negative inventory, this automatic entry reveals bookkeeping error very fast.

@shahabb

The only potential difference would be if the purchase price of the item changes on the next purchase

Manager can handle this scenario easily. If you are selling before purchasing, then inventory cost correction will look at future dated purchase transactions and will adjust your inventory unit costs retroactively (as long as you didn’t already lock the period which typically you would not so soon).

So even if you have negative inventory, you will be able to see true profit margin per sale eventually once sold items are purchased (or produced).

[shahabb]

@lubos

I don’t see it as a matter of inflating profit.

Of course, it’s going to inflate profit. Here in your example

@lubos

Let’s say we have purchased 5 books and sold 6 books.

You are recognizing sale of 6 Books however the cost of 1 extra book ($50) is then subtracted from the total expense. So the Profit is inflated by $50.

@lubos

Manager can handle this scenario easily. If you are selling before purchasing, then inventory cost correction will look at future dated purchase transactions and will adjust your inventory unit costs retroactively (as long as you didn’t already lock the period which typically you would not so soon).

Yes i know that but even temporarily the BS and P&L show inflated assets and profits.
However not sure if accounting standards allow negative inventory values.

[lubos]

@shahabb

You are recognizing sale of 6 Books however the cost of 1 extra book ($50) is then subtracted from the total expense. So the Profit is inflated by $50.

Let’s turn it around. What do you think should be the accurate profit as per my example:

$180 or $230?

My argument is that profit should be $230. Reporting $300 in expenses alone is inconsistent with having spent only $250.

[shahabb]

@lubos

having spent only $250.

That’s the main point. You have spent only $250 but soon going to spend another 50 (maybe 48,49 or 51) for that 6th Book which you have already sold. So, until then your financial statements are showing $50 more in assets and profits. So, unless that 1 oversold book is for free the figures are inflated.

And if this happens during closing period then you are reporting more sales and less expenses during that period and maybe less sales and more expenses during next period.

This issue is more visible when summary of Production Orders is entered at the end of month and for most of the month the inventory qty of an item is negative. so, until that production order is entered the BS and P&L values are doesn’t show anything close to the real values.

[Ealfardan]

@shahabb

That’s the main point. You have spent only $250 but soon going to spend another 50 (maybe 48,49 or 51) for that 6th Book which you have already sold. So, until then your financial statements are showing $50 more in assets and profits. So, unless that 1 oversold book is for free the figures are inflated.

In that sense, your sales are the reason for your inflation since more likely than not, these sales are not realized.

When you assess your accounting, you need equal attention to all principles:

1. On the one hand, @shahabb you are only concerned about “Expense Matching”

2. On the other hand, you should also reconsider your revenue recognition as well.

I would argue this, it’s not the job of Manager to ensure strict compliance to a set of principles – that would fail in many respects:

1. These principles are not set in stone. Changes to principles are indeed a commonplace occurence.

2. Principles can vary, not only from country to country, but also from industry to industry.

3. The actual legal structure of a transaction could have a significant influence on what the correct accounting treatment should be. For example, whether you can or can’t cancel or refund a sale.

Manager shouldn’t force users to comply with a certain set of principle that could not be applicable all the time everywhere. That’s a rabbit hole to be avoided at all costs.

Neither do Manager has to require perfect recordkeeping by users in order for it to work. That’s another rabbit hole.

Errors are inevitable and avoiding all errors at any cost will make the software not work in some circumstances – such as the error of negative inventory.

Instead, Manager should work in any situation and under any set of principles while providing the users with sufficient diagnostic tools to be able to easily identify errors and correct them without much effort. I believe @lubos just managed that so elegantly in this case.

@shahabb, why not create a new Total for Profit and Loss before the effects of your negative stock and then place your Negative inventory clearing after this total?

This should solve your P&L measurement issue.

[lubos]

@shahabb

So, until then your financial statements are showing $50 more in assets and profits.

I think this is where multi-step P&L comes in. Your gross profit can show $180 and then after adjustment, net profit can show $230. The point is that from taxation point of view, we certainly cannot deduct the full $300 in Inventory - cost if we spent $250 only.

When you make the purchase of that remaining book, your Net profit (loss) will change but your Gross profit (loss) remains the same (or change proportionally if the remaining book was purchased at different unit price).

@Ealfardan

In that sense, your sales are the reason for your inflation since more likely than not, these sales are not realized.

I see it the same way now. This is really a case of Inventory - sales being inflated because part of it is not realized and could be shown as a prepayment in Liabilities.

In the future, Manager should be able to calculate unrealized inventory sales and post them to Accruals module which doesn’t exist in Manager yet. @shahabb do you agree this would solve your concern?

@Ealfardan

why not create a new Total for Profit and Loss before the effects of your negative stock and then place your Negative inventory clearing after this total?

You thought of this before I was able to post this suggestion myself.

[Omar_Alsadi]

Thank you to the developer for all the solutions I thank the developer for all the accounting solutions they offer. From the new solutions “ Clearance of negative stock" That’s good Do not calculate the full profit,but where is the cost of the goods sold? . It is better to add a warning to the invontry is not enough to make sales. When selling.

[shahabb]

@Ealfardan My suggestion was aimed at producing financial statements that present a picture close to the actual situation even when recordkeeping isn’t perfect and up to date. However, the previous implementation could result in financial statements that could drastically change just by entering a single Purchase Invoice.

Yes, this Negative inventory clearing account would make Profit & Loss Statement better, but BS still remains the same.

@lubos

In the future, Manager should be able to calculate unrealized inventory sales and post them to Accruals module which doesn’t exist in Manager yet. @shahabb do you agree this would solve your concern?

Delaying sales realization or expediting inventory cost both would achieve the same goal which is having financial statements close to actual values instead of understating or overstating some accounts. So yes, that would also solve the issue.

[taha.elzein]

I understand that negative quantities (negative total) in Negative inventory clearing means I have sold items that I did not purchase yet.

In my case, I have huge positive quantities equaling increasing total cost and not reduced cost. What does it mean to have positive numbers under Negative inventory clearing? @lubos

[lubos]

@taha.elzein is this after you clicked Recalculate inventory?

Positive quantity can still end up in negative inventory clearing account but I agree this screen doesn’t explain how. I’ll have a look how I can improve this.

[lubos]

@taha.elzein check the latest version (25.10.31). I have made it more intuitive to explain how it’s calculated.

You will now see these columns:

And there will be also new Status column:

• If Status is Recovered, it means negative inventory balance went non-negative. Negative opening balance becomes negative inventory clearing.

  Negative inventory clearing = Opening Balance

• If Status is Became negative, it means negative inventory balance went negative. Negative closing balance becomes negative inventory clearing.

  Negative inventory clearing = Closing Balance

• If Status is Still negative, it means negative inventory balance went from negative to negative. The difference between closing and opening balance becomes negative inventory clearing.

  Negative inventory clearing = Closing Balance - Opening Balance

[vdebrist]

Hello. “Nice” update. Exactly at the reporting period. I have locked accounts and this update ruined FS for last 6 years.

I have thousands of transactions, when goods could be sold before delivery and purchase. Now all my inventories where sale was performed before purchasing - ruined. Thank you a lot. Even in a locked accounting period. How should I explain new entries in 2019-2024 to my auditor?

Is it possible to get my backup with all attachements before your “update” and use offline old version of manager?

[ejjaadiargo]

The update from manager often happen suddenly and previously data have been recorded, audited, and reported now changed, making it difficult to trace. Why do fundamental update often feel unsustainable and experimental, as if it’s still in a trial-error phase? Please, don’t be like this kind of update process again.

We appreciate and fully support the improvements and new features, but the update process must be handled carefully, because this concerns the accountability of many people. @lubos

[shahabb]

@lubos why not make this negative inventory clearing account optional?

A Custom Negative inventory account would solve if anyone had issue with those figures on Inventory -cost account. If not, then the system will behave like it used to do.

[vdebrist]

@lubos Thank you for your quick support. I believe this is a good feature, but for existing businesses here should be a tumbler to turn this new feature on or not and from which date. And this should not do any entries in locked accounting periods. The rest is ok.

[nouraldean]

Hi @lubos Although the profit and loss statement (in The Reports) displays the “

Cost Of Revenue

“ item correctly, a problem arises in the “Summary Window”. Manager fails to display the “Cost of Revenue” item when selecting any year prior to 2024.

However, when selecting the 2024 summary, the program, in the same window, compiles all accumulated cost of sales amounts from all previous years, including 2024, and displays them as sales for 2024.

(This is solely a display issue.) The same problem does not occur in the reports window. The version I am referring to is 25.11.6.3097.

[lubos]

@shahabb

why not make this negative inventory clearing account optional?

Wouldn’t that be worse? Your cost of goods sold would be inflated and inventory on hand could be possibly negative asset.

Negative inventory clearing ensures that Inventory on hand cannot go negative and that your profit figure is accurate.

If you sell item at $50 cost which you didn’t purchase, without negative inventory clearing, your:

• Inventory on hand would be negative $50
• Your cost of goods sold would be $50 which means your profit would be $50 lower

With negative inventory clearing, you:

• Inventory on hand would be $0
• Your cost of goods sold would be debit $50
• Your negative inventory clearing would be credit $50 which means cost of goods sold is not decreasing your profit for expense you didn’t incur since negative inventory clearing offsets it.

[lubos]

@shahabb actually, I think you are right and Negative inventory clearing account doesn’t belong on profit & loss statement. It belongs on balance sheet.

The reason why I was originally insisting on having it in profit & loss statement is that accountants can see what is cost of sales for tax purposes.

But we also have accounts such as Currency gains (losses) or Investment gains (losses) and both of these accounts require accountants to look at supplementary reports to see realized / unrealized split. Because only realized portion is tax assessable (or deductible).

Inventory - cost account is exactly the same thing where it does mix both realized and unrealized cost of goods sold. So again - supplementary report can show accountant the split (which part of that cost of goods sold is realized and which unrealized).

In the latest version (25.11.7) I’ve moved Negative inventory clearing from profit & loss statement to balance sheet. Drilling down should be more intuitive too.