Oftentimes, clients will see seemingly unexplainable adjustments to their COGS account and not understand why they occurred. Sometimes the impact of these adjustments can be rather large on transactions that include high dollar items. We have spent a lot of time working with clients trying to assist them in identifying why these adjustments occur and what is triggering them.
Most of the time item fulfillments are generated in a location that takes the inventory negative because there is not enough stock on hand available to support the transaction. Later, when another transaction is entered into the system that triggers an inventory adjustment, a system cost of goods sold adjustment is also generated to account for the COGS entry that the system was unable to make during the transaction that took the item on hand negative.
In the below example, I have a saved transaction search that is filtered to return transactions for a specific item and display the account impact of the transactions.
In April of 2021, we created an item fulfillment that did not have any on-hand inventory in that location at the time. As a result, the impact on the inventory and COGS accounts was $0. Fast forward to December 2021 where we now created an inventory adjustment to add inventory to this same location and NetSuite generated Cost of Sales Adjustments entries, crediting the COGS account $6400 and debiting the inventory account $6400.
You can see why this threw a red flag for their accounting team when they all of sudden saw this large impact to their COGS in December for a transaction that would ordinarily have no impact.
When you research this scenario in NetSuite Help you will find the following help article that details exactly what and how the System COGS Adjustment occurs.
NetSuite’s System Cost of Goods Sold Adjustments
When an in-stock item is sold, NetSuite reduces the total in the inventory asset account and increases the total in the COGS account. When an item is sold that is not in stock, NetSuite makes an adjustment to the on-hand value of the item. This adjustment is called a system COGS adjustment. A system COGS adjustment could show in financial reports or on transactions.
System COGS adjustments are a necessary procedure for tracking inventory costing used by many accounting systems. When an item is not in stock, NetSuite estimates the cost of goods sold based on historical data. Only when no historical data exists, the estimated cost of goods sold is based on the cost entered.
When the item is later added to your inventory, a linked COGS adjustment entry is also created. This COGS adjustment is triggered by any transaction that creates a positive inventory level from a negative one, including the ones listed below:
- Vendor Bill
- Purchase Order Receipt
- Assembly Unbuild
- Inventory Adjustment
This COGS adjustment changes only the on-hand value in an amount that is calculated as follows:
- [the estimated COGS (when you were out of stock)] – (the actual cost of the item when you added it back to stock)
Below are examples of posting asset lines on item receipts and fulfillments.
| Item #ABC100 | Day 1 | Day 2 | Day 3 |
| Beginning On Hand | 0 | 0 | -3 |
| Item Receipt Quantity | 10 | 0 | 20 |
| Item Receipt Value | $15.00 | $0.00 | $35.00 |
| Item Average Cost | $1.50 | $0.00 | $1.75 |
| Item Fulfillment | 10 | 3 | 0 |
| Item Fulfillment COGS | $15.00 | $4.50 | $0.00 |
| Item Fulfillment COGS Adjustment | $0.00 | $0.00 | $0.75 |
| Ending On Hand | 0 | -3 | 17 |
| Ending On Hand Value | $0.00 | $0.00 | $29.75 |
Note
For costing purposes, NetSuite considers increases to inventory before decreases to inventory.
For transactions that trigger an inventory adjustment, NetSuite tools considers all positive adjustments first before all negative adjustments.
For example, you enter an invoice that includes Item A at 6:00 AM. You enter a vendor bill for Item A at 7:00 AM, both on the same day. After you save the vendor bill, NetSuite recalculates the item cost for the invoice as if the vendor bill had been entered before the invoice. The vendor bill added the item to the inventory, therefore was considered ahead of the invoice, which removed the item from inventory. If you are facing issues, feel free to connect with NetSuite consultants.
Note
If you must enter a negative adjustment that comes first before a positive one, the two adjustments must be entered over two days. A negative adjustment shows one date, and the positive adjustment dated the next day.
When transactions are entered on the same date, they are considered by transaction type in the following order:
- Inventory adjustment worksheets (First-in-day)
- Purchase transactions (purchase receipts, vendor bills, adjustments)
- Assembly builds, component builds, transfers and transfer orders (including fulfillments and receipts)
- Vendor return fulfillments, assembly unbuilds
- Sale transactions (sales order fulfillments, invoices, cash sales, and inventory adjustments)
- Return transactions (credit memos and RMA receipts)
- Inventory adjustment worksheets (Last-in-day)
For vendor returns, differences between the vendor return authorization return cost, and the average cost of the item posts as a COGS adjustment.
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