There are a variety of inventory reports in Pacific Solutions management software.  These reports will reflect either Physical or Financial Inventories.  The Physical Reports reflect only inventories physically on hand, meaning they have been received in the system and not yet delivered.  The physical reports are not intended and will rarely tie to the inventory asset account in the General Ledger.  When the system is used properly, the Financial Inventory Report is designed to tie to the General Ledger.  At year-end or during periodic cycle counts users can discover variances between their Detailed Financial Inventory Reports and the Inventory Asset account on the General Ledger.  

The reason for variances between the General Ledger and the Financial Inventory report are usually traced back to one of the following reasons;

1. Using the Inventory asset account as an adjustment account in A/R
2. Running & comparing reports for different time periods
3. Making journal entries to the inventory account
4. Transitional issues
5. Importing an inventory spreadsheet that does not match the posted beginning balances
6. Changing the GL assignment in A/P to the inventory account
7. Failure to run the inventory maintenance routines
8. Adjusting inventory before running the maintenance routines
9. Post dating entries that affect inventory 

Reasons for Variances 

1. Using the Inventory asset account as an adjustment account in A/R:

There are places in the management system where the all of the general ledger accounts including the inventory asset account are available as a posting option.   This makes it accessible for posting when necessary. For example, in Accounts Receivable when an adjustment is being is being created, the inventory account can be seen in the drop down list as an available ledger account (see figure 1.1).  If you were to write off an Accounts Receivable invoice and if you chose the Inventory Asset Account, it would credit A/R and would debit Inventory.  The Balance sheet would remain in balance but you would have increased the financial inventory value directly at the General Ledger and would not have impacted the detailed inventory record, which would result in a variance.

2. Running & comparing reports for different time periods:

When running the financial inventory report and the balance sheet, make sure to run these for the same date range. This is important because as of this writing, the financial inventory report can only be run “As of Today” So running the financial inventory report today and the balance sheet as of a different ending date could report a variance.  In order to get an accurate picture before you start adjusting inventory manually, run the financial inventory report and then the balance sheet both as of today immediately back to back. This means that you will need to run these reports when there is no other activity happening in the system which effect inventory values. The period can be frozen momentarily to get these reports and unfrozen once they have been completed. Begin the balancing procedures with comparing these two reports back to back on the same day for today. Usually it is year-end when the inventory financials are reviewed. As common as this is, is will be much easier to self-audit inventory errors if these reports are compared on a monthly basis. Here’s what typically happens; fiscal year end arrives at December 31st. The financial inventory report is run on December 31st. On January 10th, the financial statements are run. The balance sheet is run on January 10th with a range date of “as of December 31st”. The problem with this type of comparison is that the inventory has changed over those 10 or so days. Payables for December have continued to post, inventory has continued to be delivered in a rev rec environment (what if something was un-delivered?) and inventory adjustments have continued to be made. The balance sheet is no longer a true representation of what the system looked like on the true date of December 31st. The only way to compare inventory financials is to look at the numbers on the same day. If these numbers balance then any variance after the fact would be due to data entry in the time after the initial comparison and therefore no inventory adjustments need to be made. 

3. Making journal entries to the inventory account: 

Journal entries that are made to the inventory asset account will impact the General Ledger but will not impact the Financial Inventory Records or report. The financial inventory report is a reflection of the automatic processes in the system and do not reflect manual journal entries. You must take into account the total value of journal entries from the beginning of time when comparing the balance sheet inventory value to the financial inventory report. These entries will not appear in the financial inventory report values.

4. Transitional Issues:

During the transitional period when old jobs are completing in the previous system and new jobs are begun in the new system, there could be postings to the inventory asset account that have no corresponding postings in the automated processes of the management system. This would be in the form of a manual journal entry. We recommend maintaining a separate inventory asset account for any materials not imported into the management system during the implementation process.

5. Importing an inventory spreadsheet that does not match the posted beginning balances:

During the implementation process, carry over inventory is imported into the management systems via a spreadsheet. This spreadsheet dollar value MUST match the value of inventory asset being posted to the system’s inventory asset account during the beginning balances journal entry. Any inventory asset value that exceeds the import spreadsheet value must be posted into an alternative inventory asset ledger account. If the import spreadsheet does not match the beginning balance to the inventory asset system account, you could see variances in your financial inventory and balance sheet until an adjusting journal entry is created to correct the variance.

6. Changing the GL assignment in A/P to the inventory account:

There is an option at the A/P GL Spread tab to change the posting ledger account number. If this number is changed to the inventory asset account number, then you could have inventory financial variances between the balance sheet and the financial inventory report.

7. Failure to run the inventory maintenance routines:

Perform the inventory maintenance routines before comparing any reports pertaining to inventory. This would include (but are not limited to):

1. Confirm Inventory
2. Confirm Rev Rec Delivery
3. Confirm A/R

All of these routines are directly related to inventory. This will ensure the data is the most accurate at the time you run the financial reports.

8. Adjusting inventory before running the maintenance routines: 

Make all inventory adjustments AFTER the maintenance routines have been performed. Making adjustments prior to completing this process could cause financial inventory variances in the management systems.

9. Postdating entries that affect inventory:

The system allows postdating of entries and it does warn you that you are postdating.   However, if you errantly post date an inventory adjustment in the future and you then run your financial reports as of the current day you will see a variance.  If you make payable postings and/or inventory adjustments and postdate them be sure to include these future dates in your balance sheet “as-of” date selection. Otherwise, these postings will not balance to the inventory financial reports.

Concluding Remarks.

Pacific Solutions offers audit trail research, however this service is not included in our standard maintenance and technical support agreement.  The charge for Audit Trail Research is $150 per hour.  If you would like more information please contact the Pacific Solutions help desk at 800 201 6509 or support@pacific-solutions.com.