It is suggested that the Inventory Write-off tab be modified in the following way
Be renamed to - Inventory Adjustments
Permit both the “addition” as well as the “deduction” to an Inventory Item.
That the default Allocation (account) be “Inventory - Cost” - not Suspense, but still allowing for alternate Allocation selections.
This would bring all inventory adjustments (+/-) under a single processing format rather then the usage of two alternate processes as currently required for entering stocktake variations.
This could also cater for those situations where Inventory is acquired at no cost but needs to be itemised/recorded as Inventory On-hand.
In general, I agree strongly with this idea. In fact, I know it has been considered in the context of some other inventory-related changes.
But point #3 doesn’t make sense to me. I haven’t thought this through completely, I’ll admit, but it seems that one half of the transaction (debit or credit, depending on whether you’re writing off or writing on), will go automatically to Inventory on hand. The other half (credit or debit, as the case may be) will need to go to some income or expense account of your choosing. The idea of it ever going to Inventory - cost seems wrong, because money is not involved. Your inventory costs will be whatever they are, based on how much you’ve spent to acquire the items. You now just have more or fewer items to spread those costs over.
If items vanished, there is a debit to an expense account (such as Inventory spoilage) to offset a credit to the Inventory on hand asset account. I would want to be able to choose the most logical expense account. On the flip side, if you physically count more items than Manager says you have, a debit goes to Inventory on hand and you would need to choose an income account for the balancing credit. Maybe you would have an inventory adjustment income account; maybe you put it into other income.
Another possibility is to always post the balancing half of the transaction to an expense account, Inventory adjustments, on the theory that most inventory discrepancies are losses. The occasional write-on could go as a contra entry to that expense account. But you’d lose some visibility into the write-ons.
It was put up mainly as an alternative from having “Suspense” as the default account, as many physical v’s accounting variations, e.g. resulting from a stocktake, can be without any specific cause, they just occur so the Inventory - Cost account becomes the “adjustment” location. Also, it eliminates the need to create specialised accounts for what could be inconsequential amounts/values after the netting of +'s and -'s.
This default however doesn’t preclude the user, as stated in (3), from being “able to choose the most logical expense account” as per your examples and others - promotions, donations.
But that is why it is the perfect location. “Inventory - cost” only receives allocations based on average cost not monetary valuations, which are an accumulation value based on purchase price history plus freight-in. Overtime the average cost value doesn’t have any direct relationship with a monetary transaction.
Therefore, when making Inventory adjustments (+/-) based on average cost it would be logical, in the absence of other specifics, to use both Inventory on hand and Inventory - cost accounts.
I would dispute though that a gain in inventory is an income. A farmer who has increased inventory due to natural activities doesn’t have an income from that increased inventory until it has been sold - yet most tax jurisdictions require that natural increases to be brought to account via a set nominal value which is taken up in the accounts via the COGS section.
Also, this propose modification upholds the Manager thesis of not causing the user to fight with the programme by forcing them to open specific accounts before they can make any accounting adjustments.
OK, as I admitted in my first response, I hadn’t thought through this deeply. Your points prompt further thoughts.
Not with any single transaction, obviously, but with all prior transactions. Basing the adjustment on average cost makes complete sense to me. That would be what happens if you credit Inventory on hand and debit an adjustment or miscellaneous account. But directly debiting the Inventory -cost account does not seem right, because it would mean changing the average cost of remaining inventory items.
Perhaps not yet, but surely, then, an asset that can be converted to income in the future. And an upwards inventory adjustment can only result from differences between actual stock levels and accounting stock levels, meaning that the transactions that produced the lower-than-actual accounting stock levels were erroneous. So they need to be compensated for. COGS expense would have been incorrectly increased before, falsely decreasing reported income. With the upwards inventory adjustment, that income needs to be recaptured. It does get complicated.
But it also runs the risk that users will allow the default account allocation to remain, even when it is wrong. Then you have no obvious method for tracking down problems. Keeping the default as Suspense matches what the program does everywhere else and provides an obvious pointer to mistakes.
Nay, average cost can ONLY be adjusted by purchases and freight-ins. When you create a Sales Invoice, besides the income side, it creates a transfer between Inventory on hand and Inventory - cost based on average cost, this transfer doesn’t cause an alteration to the average cost so why would a transfer in reverse based on the same average cost be able to alter the average cost.
In case you aren’t aware, within the Inventory Write-off tab you can only enter quantities and the accounting values are generated by multiplying them by the average cost so the same would apply in reverse. Your point would be valid if a user could enter both quantity and unit price values
Yes but against the “COGS expense that has been incorrectly increased”. No different to when you return an item for credit, you put it back against the account which received the expense, so you put the inventory back against Inventory - cost which received the expense and therefore has been “incorrectly increased”.
The thing to keep in mind is that generally inventory adjustments are minuscular in relation to inventory values except when there is a deliberate activity - promotions, accidents, out of date etc.
I agree totally with points 1 and 2 but see no need to change the ‘Suspense’ naming.
At present I have been adjusting stocks by using Receipt and Payments as appropriate but this has an effect on other areas that I did not realise until I was gathering together the end of year accounts.
My problem is that my daily sales by item are recorded manually and of course that allows for errors. I may get say 100 units in actual cash but recording of only 90 units in sales. When I stock count, which is done daily on a varying range of products, these discrepancies come to light but cannot necessarily be related to a specific or some stock items. If I decrease the number of items on stock to allow for recording errors, this also affects elsewhere but, theoretically, has no cash value as the cash has already been received and banked.
I really cannot get my head around this one. Answers in words of one syllable please because I am an accounting novice.
I think the idea would be great to easily deal with the physical inventory to do adjustments instead of just having the inventory write-off.
I’ve dealt with several softwares that all had a way of handling inventory adjustments/reconciliations (write-on/write-off) @Brucanna made the idea clear.
I really hope it will be taken into consideration in future updates.
There are needs to update inventory value upward with/without changing the quantity and even downward with/without changing the quantity.
Examples for value changes without quantity changes:
-Upward adjustment-: import costing is finalized sometime later. Where approximate cost will be used for inventory as the selling should be started before receiving exact bills.
-Downward adjustment-: for the same reason which has the lower import cost when the final bills are received. Also, when market conditions change making inventory less valuable or damage to physical conditions occur.
You can already do both with journal entries by leaving the quantity blank.
That is not an appropriate justification for changing the value of inventory, which was determined when you purchased the inventory. Changes in market value will simply alter your profit unless you change your selling price.