The manual subcontracting process is as follows:

Assumption: Inventory Valuation is configured to Automated

1. Create PO for Unmodified Product from Vendor.

2. Create PO for Modified Product from Subcontractor. 

3. Receive Unmodified Product from Vendor. 
   

4. Create Delivery Order to transfer Raw Materials to Subcontractor. 

5. Receive Modified Product from Subcontractor. 

6. Create Bill to pay Vendor.

7. Create Bill to pay Subcontractor. 

The problem is that there is a remaining balance in the Stock Interim account for the Delivery of the Unmodified Product to the Subcontractor. This is because we do not have to create a Bill for this transfer. 

Here are the Journal Entries that are created:

1. Create PO for Unmodified Product from Vendor.

2. Create PO for Modified Product from Subcontractor. 

3. Receive Unmodified Product from Vendor. 

4. 1. 
      

      	Debit	Credit
      Stock Valuation	$X
      Stock Interim (received)		$X

5. Create Delivery Order to transfer Raw Materials to Subcontractor. 

6. 1. 	Debit	Credit
      Stock Valuation		$X
      Stock Interim (received)	$X

7. Receive Modified Product from Subcontractor. 

8. 1. 
      

      	Debit	Credit
      Stock Valuation	$Y
      Stock Interim (received)		$Y

9. Create Bill to pay Vendor.

10. 1. 
       

       	Debit	Credit
       AP		$X
       Stock Interim (received)	$X

11. Create Bill to pay Subcontractor. 

12. 1. 
       

       	Debit	Credit
       AP		$Y
       Stock Interim (received)	$Y

Again, the problem is that there is a remaining balance in the Stock Interim account for the Delivery of the Unmodified Product to the Subcontractor. This is because we do not have to create a Bill for this transfer. 

If we put the Subcontractor as an internal location, then it won’t generate JE, but that’s not an option because we need to subtract from Stock Valuation account when we transfer the Unmodified/Raw product to the Subcontractor. 

What we can do then is to create new CoAs and Location to track this balance. The Location should be a duplicate of production with the Stock Interim (incoming and outgoing) accounts set to the new CoAs.  Then the Operation Type should be associated with this new Destination Location. 

Ask the Client to ask his accountant, what journal entries he/she wants to see?