Production Orders Not Taking Inventory from Credit Notes

Greetings to All Forum Members,

This forum is really helpful and supportive. So here I am (again) looking for solution of the problem I am facing.

Some Details: I have a Customer who doesn’t pay me in cash. He pays me with inventory items. So I provide him Item1 (or some services) and receive Item2 in return. I use Credit Notes to count this in manager.

The Problem: When I make a production order that requires item2 . It doesn’t gets completed and says there is insufficient quantity of item2 . (I have item2 in stock).

If I obtain item2 with Purchase Invoices or Journal Entries , Production orders work fine. But it doesn’t seems to work with Credit Notes .

Thank you for reading, I Will be waiting for answers.

Safdar Khan.

The settlement should be a transaction between accounts payable and accounts receivable (With a journal entry). Credit Note’s purpose is to reverse sales and therefore, you should not use it to settle your liabilities.

1 Like

You are offsetting a sale against a purchase. See the Guide: Since no money is changing hands, enter quantities, but no unit prices.

While your action appears logical, the Credit Note is adding inventory to Item2, Manager sees Credit Notes as a reversal of Sales not as a “purchase” of inventory, To me this is a flaw (rather than a bug) as positive inventory is positive inventory and Production Orders shouldn’t reject that positive inventory because it wasn’t “purchased” or “manufactured”.

Your solution is to create a Purchase Invoice for Item2 rather than a Credit Note and then offset the Accounts receivable with Accounts Payable balances via a Journal.

This makes no sense, money may not be changing hands but inventory values are changing.
The Item1 sales invoice value, say $100, becomes Item2 inventory cost value. Just entering quantities without any unit values means that no inventory value is being allocated to Item2

1 Like

It is neither a flaw nor a bug, because the program does not behave as you suggest. Inventory quantities added to stock via credit notes are very definitely available for production orders. The insufficient quantity warning @msafdaar wrote about arises because the necessary quantity is not yet owned. He did not provide sufficient information to know why. It could be he has not purchased enough. Or, if he is using delivery notes, he may not have entered a delivery note with negative quantity to complete the credit note. Either would explain the problem.

So, @msafdaar, you do not need to enter a purchase invoice. You need to correctly identify the source of the insufficient quantity warning and fix that.

Your objection has some validity, up to a point. What changes is average cost of the inventory items involved, not overall inventory value. What was described is a straight barter transaction, where the value of one commodity or lot has been agreed to equal the value of the other. So the values of both subsidiary ledgers in Inventory on hand remain unchanged if you take the quantities-only approach. But since the quantities change, the average costs change.

Imagine an inventory holding 5 of Item A at $1 per unit average cost ($5 total in Inventory on hand) and 10 of Item B at $2 per unit average cost ($20 total in Inventory on hand). You barter 2 of Item A for 1 of Item B, with no money changing hands. Item A now reports 3 units with total value of the same $5, for a new average cost of $1.67. Item B shows 11 units at the original value of $20, for a new average cost of $1.82.

Now consider a situation that starts with the same conditions, but uses separate payments and receipts instead of a barter transaction. You sell 2 of Item A for $2 (zero markup to keep things simple). You now have 3 units on hand worth $3 total. You buy 1 of Item B for $2. You now have 11 units on hand worth $22. Average costs for both inventory items are unchanged at $1 for Item A and $2 for Item B.

Notice that the grand total of Inventory on hand for both scenarios remains at $25. Why the difference between resulting average costs after what seem on the surface to be equivalent exchanges? The barter transaction (the first scenario) effectively fixes the purchase cost of 1 additional unit of Item B as the sales cost of 2 units of Item A. But the receipt-and-payment scenario actually transfers monetary value between the subsidiary ledgers for Item A and Item B.

So yes, in this simplistic example, I concede the receipt-and-payment approach would be more accurate. But the effect diminishes both with higher quantities on hand and larger turnover volumes. Since the overall value of inventory is unaffected, it may not be worth the effort.

I believe what you are advocating is that you should include monetary values in the barter transaction, presumably to achieve the same result as the receipt-and-payment approach. I agree that would technically be more accurate at fine scale. To do that, though, you also have to consider the need to balance the journal entry by which the barter transaction is entered.

If you credit Item A $2 (-2 units x $1 average cost), representing your cost of goods, you would need to debit Item B by the same amount. The result is exactly the same as my first illustration—no changes to average cost. But that is only because I deliberately chose values to make things come out evenly. What if the current average cost of Item B was $2.10? Then, to balance the journal entry, you would enter the debit at $2 for 1 unit, and the average cost would be lowered. What makes that new average cost more valid than the old one, since it is unrelated to any purchase of Item B, only to purchases of Item A?

To flip things around, you could also record a journal entry where the cost deducted from Item A was determined by the current average cost of the unit of Item B being acquired. But is that any more accurate? And what if you have none of Item B on hand, and therefore cannot determine an average cost?

I think this reflects why tax law and accounting standards surrounding barter exchanges are frequently complex.

1 Like

I would take the simplest and straightest way. A sales invoice, a purchase invoice and a journal entry to compensate the payables Vs the receivables. By the way this is the thing closest to the reality of fact and accounting should reflect it.

I would do same.

I won’t disagree. I only note that the bottom line is the same in the long run either way. Where you may encounter differences along the way is in the cost of goods sold, but only until current quantities work through the system. As I said, you must determine whether the effort is worth it. For those with relatively few inventory items sold, especially of large value, it would be. If you are trading trinkets at a rapid pace, everything will probably cancel out before you can make the entries.

It is also exactly the procedure suggested in the guides where an entity is both a supplier and a customer.

If you wanted Manager to offer enhanced support for barter transactions / Counter trade / Recipient-created tax invoices then in my opinion this is best done by adding transaction level support for it. Such as a check box on invoices (and payments/receipts) which when check enabled entry of the counter trade with appropriate tax codes. Total for each transaction can be shown and grand total. The mock up below is for a sales invoice or receipt (reverse sale / purchase labels for purchase invoice or payment).

The only issue I can see is variation in opinion on what the other transaction level options should apply to.

The alternative is line item support for sale / purchase specification. The same problems with transaction level options still occurs, but you also loose the totals and the underlying transactions are not as clear in my opinion.

Do not purchase inventory items using credit notes. Create purchase invoice, then offset sale against purchase as per @Tut answer.

The reason is that credit notes will debit your Inventory - sales income account which is not what you want.

I’m not sure why you get insufficent quantity issue on production orders because credit notes will still add qty to your inventory on hand.

As I speculated earlier, I suspect @msafdaar is not issuing delivery notes (with negative quantity) to complete the credit note transaction chain. So Manager doesn’t think the inventory is available. That is a frequently overlooked necessity if the Delivery Notes tab is enabled but not really necessary.

Delivery notes are not required for production orders. They are merely tracking where item physically is. Production orders do not care where the item is physically.

You can test it. Delivery notes have no impact on production orders whatsoever.

My mistake. You are right. I must have done something wrong when I tested this earlier today. So lack of a delivery note is not the issue. That only leaves inadequate purchasing as the reason.

I was using credit notes to ‘buy’ from customers. Now i understand that they are only for reversing sales. Buying with Credit notes will make my Inventory - sales inaccurate.
In future, i will buy items using Purchase invoices and use Journal entries to balance the accounts.

I think production orders don’t work with items obtained by credit notes.
I will attach some screenshots bellow:

Why do you say the production order is incomplete in this new example? You have not illustrated that.

You also never purchased any wheat in this latest example. You recorded return of wheat you never owned and could not have sold.

Because it shows insufficient quantity in Screenshot 2.

Not that you have shown.

I did not use the credit note to record return of wheat. I used it as a purchase invoice of wheat.
Now i understand that credit notes are wrong way to add wheat in inventory and I will not use this method again in future.
But still, the credit note increased my quantity on hand. I can even sell that qty on hand with a sales invoice. But it doesn’t work with production orders.
You can see the second Screenshot in the image i attached above . The production order shows there is insufficient quantity of wheat and thus it is incomplete.