Cost of Sale adjustments

Cost of Sale adjustments are usually being generated by the system in order to recognize the actual Cost of Sales if the item is sold underwater (selling the item even when you don’t have the item in stock).

When the negative inventory occurred, the system records an estimated value for the selling transaction (since the current on hand is 0, upon selling/inventory decrease, the item has no actual cost to be recognize) thus when you created a positive adjustment and entered the correct value, the system generates this COST OF SALES ADJUSTMENT to correct the total value of the inventory.

To have a quick sample:

Item A has 0 on hand as of 6/30/2020.

By 7/1/2020, users entered a standalone cash sale for 5 units of Item A, hence bringing the on hand to -5

The GL impact of the Cash Sale is 0 (assuming there are no historical data for Item A)

Users then entered an Item receipt the next day, 7/2/2020, for 10 units at a rate of $10

The ending balance of the Item should be $50 (10 from the receipt less 5 from the earlier sale). However, since in the Cash Sale is 0, we should then recognize a COGS to correct the value of the item.

With this, the GL impact would be:

Cost of Sale Adjustment $50 (the COGS that should have been recognize if the $10/unit cost and on hand was established before sale.)

Inventory Asset               $50

Accrued Purchase:                         $100

Inventory is in an underwater state when the on-hand quantity of the item is below zero.

-to check you may create a customized Inventory Valuation report with the following steps:

1. Navigate to Reports > Inventory/Items > Inventory Valuation > Customize Detail
2. Highlight Qty column, then mark the Add Running Balance Column checkbox
3. Under Filters tab:
   1. Expand Inventory Item > Name > Enter the name of the item involved
   2. Filter Location to the location of the Item Receipt
   3. Filter date
4. Assign a Name
5. Hit Save

With this, look for the transaction that bought the on hand to negative.

This COGS adjustment is a way for the system to correct the cost of the item due to the underwater sales. Hence, the removal of its GL impact is not necessary since the purpose of the system generated COGS adjustment is to recognize the should be COGS at the time of sale.

Nonetheless, users may opt to change the Date of the Item Receipt to the date of the sale/fulfillment transaction (or even a day before the sale/fulfillment transaction if applicable). This is to have an on hand (and a cost) in the said Item before the sale, avoiding the underwater/negative inventory sale.

In backdating the Item receipt,when transactions are entered on the same date, they are considered by transaction type in the following order:

1. Inventory adjustment worksheets (First-in-day)

2. Purchase transactions (purchase receipts, vendor bills, adjustments)

3. Assembly builds, component builds, transfers and transfer orders (including fulfillments and receipts)

4. Vendor return fulfillments, assembly unbuilds

5. Sale transactions (sales order fulfillments, invoices, cash sales, and inventory adjustments)

6. Return transactions (credit memos and RMA receipts)

7. Inventory adjustment worksheets (Last-in-day)

Thus Item Receipt will be considered first by the system before the fulfillment/selling transaction if the Item Receipt is backdated the same day with that of the fulfillment.

Please note that changing the date will trigger a cost recalculation. Books cannot be closed unless this recalculation is finished to avoid costing issues. The amount of time it takes to complete the necessary costing recalculations depends on the amount of data affected by the change per item. Recalculations may take a long time if an edit to a transaction was occurred at some point early in the transaction history of an item (or more likely, many different items). In that case, the recalculation would need to go through all subsequent transactions for that item to evaluate what costing adjustments, if any, need to be made.

Another option would be to create manually Journal Entries to offset the impact of the adjustment. This is if the transactions involved are already in a closed period (or users would not want to trigger the Cost recalculation by backdating the transaction) and users really want to remove the effect of the adjustment. However, to reiterate, in essence the Cost of Sale Adjustments corrects and recognizes the should be Cost of the item and its sale during underwater, hence in my opinion, the offsetting of the GL impact is unnecessary.

Moving forward, you may refer to these points in order to avoid underwater sales (and avoiding COGS adjustment as well):

1.     Insist on prompt entry of item receipts.
2.     Require item receipts to be entered with the date of receipt instead of the entry date if the receipt is not entered the same day it is received.
3.     Always use sales orders to sell inventory.
4.     Always fulfill orders from sales orders.
5.     Set the Fulfill Based on Commitment preference to Limit to Committed.
6.     Avoid entering standalone cash sales and invoices. Standalone transactions have no commitments or checks and balances to prevent you from selling out or going underwater.
7.     Use the Inventory Level Warnings preference. This preference gives you instant feedback on each transaction as to whether or not you have items in stock.
8.     Perform a physical inventory count on a regular basis to assess whether your inventory data is consistent with the physical count of your stock.
9.     If the physical count is higher or lower than the quantity on hand based on the item record, the count needs to be reconciled to match actual inventory levels.
10.     Use the Review Negative Inventory page to identify inventory items that are underwater.