At one client, we track inventory using composite (bundled) items, and in the system settings we have enabled the option to prevent stock from going below zero.

After the year-end physical count and quantity adjustments, we identified a mismatch:

• Inventory Valuation Report: 826 KWD

• Raw Material GL balance: –5,065 KWD

Upon further analysis, we identified the following issue (illustrative example):

We created a composite item with a total cost of 1,000 KWD, consisting of:

• 700 KWD Direct Labor

• 300 KWD Direct Material

However, the composite item was linked to the Raw Material (Direct Material) inventory account.

When we assembled (bundled) the composite item, the system recorded:

• Dr Raw Material 700

• Cr Direct Labor 700

When the composite item was sold, the system recorded:

• Dr COGS 1,000

• Cr Raw Material 1,000

It appears that these entries were impacting the Raw Material GL account, but not correctly affecting the raw material item quantities reflected in the Inventory Valuation Report.

At year end, during the physical count, the quantities did not match the system, so we performed a quantity adjustment:

• Dr Other Expenses

• Cr Raw Material

As a result, the Raw Material GL became negative and no longer matches the Inventory Valuation Report.

We have now corrected the methodology by assigning a separate GL account for Finished Goods going forward. However, we need guidance on how to resolve the historical mismatch, especially considering that the Inventory Asset account does not appear in manual journal entries because it is a stock-controlled account.