How to Treat Negative Stock Balance affecting Balance Sheet

[txuma]

Hello everyone,

I would like to find out how to treat an accounting issue currently being experienced when using Odoo software.

We currently use perpetual inventory valuation system to manage our accounting and sometime last year during an Inventory Adjustment the following entries were made automatically
Debit: Stock Valuation Inventory Account - $100,000.00
Credit: Stock Valuation Interim Inventory Account (received) - $100,000.00


this resulted in there being a negative -$100,000.00 entry in the balance sheet. Usually the entries are as follows;

For the purchase process:
1. The first journal entry is created when the delivery order is received/confirmed - i.e. Credit the Stock Valuation Interim Account and Debit the Stock Valuation Account.
2. The second journal entry is upon confirmation of the Vendor Bill - i.e. Credit the Account Payable & Tax Paid Account and Debit the Stock Valuation Interim Account.

This way the Stock Valuation Interim Account is balanced i.e. it has a Zero Balance.

However, with Inventory Adjustments - Only the 1st Journal Entry is passed, there is no second entry debiting the value from the Stock Valuation Interim Account.

*My question is how can we clear this -$100,000.00 entry so that the Stock Valuation Interim Account has a zero balance.*

We have tried using an expense account but it doesn't give the desired result as we would have the following entry
Debit - Stock Valuation Interim Account
Credit - Inventory Write-Off Account

This means that the P&L report would read it as a profit because Income - Expense = Profit

e.g $500,000 - (-$100,000) = $600,000.00

We'd like to find out how we can have the expense account be a debit entry of $100,000.00 so that the result would be

e.g $500,000 - ($100,000) = $400,000.00

Thanks in advance for your help!

 

[kirby]

If I understand correctly, you have a $100,000 credit balance in the Stock Valuation Interim Account that never clears out and this arose because $100,000 of inventory was recorded during an inventory. First if possible you should research the inventory sheets that showed the "extra" $100,000 in inventory. Hopefully, the description of the extra inventory on the inventory sheet can lead you to the vendor from whom you purchased the inventory. Then review that vendor's accounts payable history to see if you can find the discrepancy. It may be a cut-off issue where the inventory was received before inventory day but the invoice for that inventory was received after inventory day.

The error can also arise from inventory being sold but the journal entry showing the credit to the Stock Valuation Inventory Account was missed. To find that, look for months where gross margin was unusually high.

If the research fails to find the error, you WILL have to DR Stock Valuation Interim Account $100,000 and clear this out by a credit to a P&L account. If so, document this as well as you can and have management review and approve before you do so.

 

[txuma]

Thank you very much Kirby, this is some very useful insight on how to solve this issue.