I know it might sound a bit weird, but I need to adjust the Inventory-Sales of an Inventory Item by using the journal entry. This seems to be not possible.
The case:
I agreed with a client that the discount on that item, purchased and invoiced in December, would not be entered in that invoice, but will be honored/corrected in January together with the next purchase.
Therefore, for the fiscal year 2020 I still have a “still to be credited” amount which has to reflect the inventory profit margin (not a cost):
Inventory sales (item) -1000 (credit)
To be credited or Acc.Receivables -1000(debit)
In January 2021 then, line 2) will be reversed in the invoice of the new order.
I know that a credit note affects the item in inventory sales and on-hand, but I may not issue it antedated and the adjustment should reflect in Balance and P&L 2020.
It’s just an accounting adjustment of revenue recognition not recorded in a specific period.
The use of a secondary sales account is not the right option, since it will not affect the Inventory Profit Margin.
A similar issue was raised by Brucanna a few years ago in the thread 6234, but probably there was no sequel.
I would have doubts about the legality of the proposed transactions - issuing invoices for the incorrect amount would appear to be moving profit from one accounting period to another and it most jurisdictions that would be unlawful.
A diligent auditor should pickup this kind of profit manipulation
By agreeing to do this, you are complicit in your customer’s fraudelent accounts
From technical point of view, I don’t think it’s a problem to allow inventory P&L accounts to be used in journal entries.
If you use custom P&L accounts for your inventory items, then you can already use them in journal entries. So that could be a workaround. Make all your inventory items to use your custom P&L account.
Accounting Adjustments and Revenue or Expenses Recognition are necessary in order to allocate transactions in the right accrual period. Accounting adjustments definition
If an invoice or credit note (receivable or payable), concerning a previous or later period, has not been invoiced yet, I have to allocate that financial transaction with an adjustment.
Excuse me, maybe I misunderstood what you wrote.
I understood “you agreed a discount with the client for goods/services supplied in one accounting period but then the two of you agreed not to recognise the discount until the next accounting period”
I could be wrong but that seems incorrect accounting to me
If your adjustment is regarding the recognition of income or expense before invoices are issued or deferral of recognition of invoices already issued. Then yes those are adjustments that should be handled outside of the billing / expense processes.
You should issue a reporting (reclassification) journal entry at the end of the reporting period and reverse it the next day so it doesn’t interfere with the daily operations for collections, payments and fulfillment.
However, you have to admit that @Joe91 could be right here, the customer’s request is fishy. There’s many reasons for his request, but none of the ones that come to mind appear legal.
Of course @Rox, none of us here is suggesting you are doing something wrong but you might want to watch out for these kinds of requests.
@Joe91@Ealfardan, Thank you for your inputs. Appreciated.
I understand you both and I can assure you there’s nothing obscure behind. I was probably also not entirely clear in my first post. I’ll try my best although a bit off-topic.
A sales order with different items was confirmed in December. Because of the ‘interesting’ size, I granted a 50% discount on 1 item, clearly stated in the offer.
On client’s request, the delivery was split into 2:
to be delivered end of Dec (including the discounted item),
to be delivered end of Jan the remaining.
I agreed with the condition that the granted discount on that delivered item would be deducted from de 2nd invoice (as assurance, might he cancel de 2nd delivery = no discount…you never know).
2nd part will be delivered as agreed of course, but the point remains that theoretically and practically I close 2020 with a debt towards a client and a higher profit margin on an item that I’d like to adjust.
I might disagree with @Joe91. But that would depend on whether you invoiced for the full order in 2020 or only the portion delivered. Your description expresses a reasonable doubt that the second part of the order will be concluded. This would be reinforced if you only invoiced for the first part. Whatever contract you may have considered valid at the time of entering a sales order, it was clearly modified by subsequent negotiation and agreement. Therefore, a reduction of net income in 2020 based on an accrued discount to be applied in 2021 would not be appropriate.
To clarify, there was not a doubt that the second part wouldn’t be concluded…it’s just never say never.
And yes, the first part was invoiced, the second proforma, just in case of slight adjustment in adding or deducting items along the way.
In that case, it doesn’t sound like there is anything to adjust. Or, when you issued the sales invoice for the first part of the order, did you actually apply the discount to it? If you did, I still think a credit note is the correct approach. And it should be recognized in 2020, as that was the income period during which you agreed with your customer that you had overcharged. I see no basic difference between issuing a credit note with a 2020 date and making a journal entry to adjust the income in 2020. Both accurately reflect what occurred. And both follow fundamental accounting principles for accrual accounting.
Yes I know, a credit note is the cleanest and was my first choice.
Within the same year or quarter, there was no problem.
But I’m quite sure the client already submitted his VAT declaration, closing 2020. And I do not really like such an evident antedating practice.
Moreover, by issuing a credit note I give him a credit blindly.
No, I didn’t apply any discount on the first invoice, this would be settled in the second, by reversing, in the last line, the credit created by the adjustment in the Journal.
I was really convinced that Inventory Sales adjustment was possible in Journal Entries.
It works with Inventory on Hand but not Sales.
But that’s what I always said: granted in the order but not activated in the invoice. If it was already activated in the first invoice, I wasn’t here bothering in this thread
Accounting speaking, all directions are possible and maybe unconcerned, even with “nothing to adjust”, as long left reflects right.
Financially it’s maybe a bit more concerned (budget, profit, margin, accrual period, fiscality, …etc).
@Rox, I have no idea what your last post means. You say, “But that’s what I always said…,” agreeing with my statement that there is nothing to adjust. But your first post began with “…but I need to adjust…”
Not exactly, you mention “No discount was applied to the first order”… yes and no.
I mean that discount was granted (applied) in the order but not activated (deferred) in the first invoice.
However, I’m looking for a suitable solution. If it does not show up, then I leave it as it is or activate a deferred discount expense or something, which is quite different than keeping the inventory profit margin clean.
But please stay tuned, I might need your opinion and help on this:
I tried to exercise with a credit note, just to keep it temporary on the sideline on-hold, but strange things happen:
Actual period Inventory profit margin (see item 3rd line):
By issuing a credit note, Balance and P&L go fine, but in the Inventory report nothing happens. I do not post the picture because is identical.
By issuing an invoice (with a negative amount), this is processed in the Inventory report accordingly.
I did it different times, supposing a mistake from my side, but get always the same result.
Unfortunately, @Rox, your posts are getting more confusing and contradictory:
If, by “order,” you are referring to a sales order, forget about that record. As I said earlier, sales orders have no impact on anything. You might as well not have entered it. And “granted” means nothing on any transaction in Manager. Nor does “activated.” You either applied a discount on the first sales invoice or you did not. Which did you do?
I believe you are referring to the Inventory Profit Margin report. I believe the developer’s intent is to show profit margins on sales transactions only, not overall profitability of an inventory item. This would be because of the difficult of incorporating freight-in cost reversals and inventory kit profit reversals due to credit notes or direct refund payments. That is another way of saying you are looking in the wrong place for the result of your credit note. It’s effects are where you saw them.
