Several problems can arise when inventory is entered into the system without a cost.
The cost price of inventory is used to calculate the inventory's value, so inventory without a cost is valued at nothing. When that inventory sells, no cost is recorded against the sale, which then affects your sales and financial reporting.
This guide will go through how this situation occurs, its impact and how to perform corrections if you found you have received and sold stock at zero cost.
How does it happen?
The cost of your inventory is set at the point the inventory is received into stock. If at this point its cost price was set to zero, it will be entered into stock without a value.
Sometimes, this is fine - for example, if you receive something for free, you may wish to record it as being zero cost. However, in most cases, inventory should always be received with a cost price.
You are usually able to adjust the cost before you receive inventory in, whether that's through a purchase order or when making manual adjustments, but taking certain precautions will reduce the opportunity for error.
Here are some things you can do:
- Check there are no products without a price on your default cost price list
Price lists are used to automatically populate purchase orders and the manual inventory adjustment modal with a suggested cost price. Ensuring all products have a price on your cost price lists - especially the default cost price list - will ensure these fields are always filled in.
To perform the check:
- Go to Products > List products/services
- Click "Show filter" and select your cost price lists in the "Display prices" field, then filter the report
- Export all products to Excel
- Use conditional formatting to find products missing a cost price on the default cost price list
- Update those products with a cost price, either using a product import or a price list import
- If importing inventory, always leave "Allow zero cost prices" unchecked
When performing an inventory update by CSV, there's an option to "Allow zero cost prices". If the checkbox is left unticked, trying to import products with a zero cost price will throw an error message.
Inventory in stock with zero value
Having inventory in stock with no cost price means the asset value on your balance sheet is understated. If you have incorrectly received inventory into stock with zero value, you will need to revalue it as soon as possible.
You can find your zero-value inventory by going to Products > Inventory detail and exporting the report. You can then sort by the "Price" column to find any rows with a price of zero.
In order to revalue inventory, go into the inventory detail report and click the pencil next to the price in the "Price" column.
Accounting implications of revaluing inventory
Adjusting the price removes the unit at zero value and adds a unit at the inventory value.
This will post an inventory adjustment (IA) journal:
|5XXX Inventory adjustments||X|
Be aware you can't backdate inventory adjustments, so the accounting will be posted to the date you do the adjustment. You may wish to post further adjustments to account for that, perhaps by posting a journal to move the value to the balance sheet, then posting further journals back to the income statement.
Selling inventory at zero value
If you've received inventory in at zero value you may also have sold that inventory. Selling inventory at zero value affects your income statement, as no cost is posted when the sale is shipped, therefore overstating your profits.
You can identify whether any zero-cost sales have occurred by going to Products > Inventory audit trail. Export the report to Excel, then filter for rows where:
- The "Quantity" is negative
- The "Price" is 0.00
- The "Reference" begins with "SO#"
That will leave you with all sales where stock was sold at zero cost.
Once stock has been sold, it's not possible to correct the sale - i.e. the sale's margin will always display as 100%.
However, you can post accounting journals to adjust the income statement.
Please see the Correcting the cost price of inventory which has already sold help document for further guidance.