This article is relevant if you’re managing NetSuite returns and item receipts and experiencing impacts on your Cost of Sales Adjustments in the general ledger.
Background
NetSuite’s transaction architecture is designed to be flexible, catering to a wide range of inventory distribution scenarios. It efficiently handles both logistics and accounting needs within its record-keeping system. However, in practice, despite the availability of fundamental transaction records, there’s often a need to integrate these records into cohesive business workflows, reducing the reliance on isolated record operations.
A classic example of such a scenario is the product exchange process, which inherently involves six discrete steps: Customer Return Authorization, Item Receipt, Credit Memo, Sales Order, Item Fulfillment, and Invoice, all of which need to be reconciled. Additionally, a Case record is usually created to initiate and manage the exchange process.
To address the complexities of such returns and exchanges, our firm, Prolecto Resources, has developed a license-free Returns Manager tool, as detailed in my 2023 article, Drive Comprehensive NetSuite Product Returns and Refunds. This tool offers a holistic solution for organizations facing intricate returns and exchange challenges.
Best in Class Supplier Return Practices
Managing returns isn’t just about handling customer returns; it often involves returning goods to suppliers as well. A key aspect of efficient vendor return practices is promptly processing customer returns and sending them back to suppliers. This approach helps avoid the accumulation of returned inventory and ensures the company receives the appropriate vendor credits or debit memos.
An optimal return operation involves receiving a returned item, conducting a quick inspection, and then immediately dispatching it to the supplier. In certain cases, returns are streamlined further by having customers send the goods directly to the supplier, bypassing the warehouse. Our Returns Manager tool simplifies this process, making it straightforward to manage.
While the logic of this process is sound and can be effectively managed with the right tools, implementing it in NetSuite can reveal a significant issue. Specifically, an enhancement identified as #395288 addresses a flaw in NetSuite’s costing engine’s order of operations. This flaw can lead to Cost of Sales Adjustment entries in the general ledger, particularly when dealing with customer return authorization item receipts, an issue that arises with negative or insufficient inventory levels.
Why are the Returns Producing Cost of Sales Adjustments?
The issue of Cost of Sales Adjustments arises due to a specific sequence in NetSuite’s costing engine operations, particularly when customer and vendor returns occur on the same day. As I discussed in my 2022 article,Understand NetSuite’s Intraday Inventory Ledger Costing Impacts, the rules for NetSuite’s same-day costing were outlined based on our knowledge at the time. Understandably, the costing engine doesn’t factor in the exact time of day for transactions. Instead, it uses a set of reasonably good assumptions based on transaction types to determine the sequence for calculating inventory values.
The crux of the problem lies in NetSuite’s assumption that, for costing purposes, outbound item fulfillments for vendor returns are processed before the inbound item receipts from customer return authorizations. This creates a logical inconsistency, where an item is considered to have left the warehouse (resulting in negative inventory) before it is recorded as received.
NetSuite is aware of this discrepancy and has logged Enhancement 395288 to address the issue. However, as of now, there’s no announced timeline for the implementation of this enhancement.
Mitigating Cost of Sales Adjustments on Returns
A practical solution to circumvent the issue leading to Cost of Sales Adjustments involves spacing out the transactions over different days. Specifically, ensure that the item receipt from a customer return is recorded on one day (ideally, the actual day of return) and that the related item fulfillment for the vendor return is documented on a subsequent day. This approach prevents the costing engine from encountering the anomaly, as it no longer falls within the same day.
Leveraging our Returns Manager, we have the capability to automate this offset in record dates. Although not an ideal solution, it has proven to be a workable compromise for our clients. A critical aspect of managing with this approach is the impact on accounting periods, as the item fulfillment might fall into a new period, even though it pertains to transactions of the previous period. This necessitates adjustments and refinements in period-end closing practices to accurately reflect the transactions.
Acknowledging Excellence in Prescribed NetSuite Solutions
I extend my gratitude to Mathieu L., our Operations Practice Manager, for his exceptional leadership in devising this solution. His grasp of the NetSuite transaction engine and its accounting implications enables us to deliver best-in-class solutions to our clients. We often meet prospective clients seeking to enhance and optimize their NetSuite setups. Our approach is consistently appreciated for prioritizing business requirements, very carefully evaluating the transactional and accounting consequences in our proposed NetSuite strategies, and considering the practical aspects of daily record management.
Our license-free technologies, LABS, reinforce our commitment to client service and optimization. As a NetSuite Systems Integration practice, we believe in the vision of a single system to run the business- it’s really a matter of ambition, not technical capability. We repeatedly overcome any perceived limitations on the NetSuite platform; let’s remember that it’s all software — it should be shaped to take care of pragmatic business concerns.
If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If you are ready to tackle your returns flows, let’s have a conversation.
Marty Zigman
Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.
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