My client took over a QBO file 3 years ago when he purchased his business. The inventory tracking was turned on and the products were entered by the previous business owner so whenever my client entered a sale it would decrease the inventory. Unfortunately, for 3 years, he hasn't been doing anything to increase the inventory so the numbers are completely wrong. He merely posted the supplier bill totals to Cost of Goods Sold. I tried going back and entering bills from the previous years but that doesn't seem to be working. I also discovered that my client had been entering the quantities incorrectly on the sales orders. For example, product ABCD is one case of 12 widgets (quantity of 1) but my client would use part ABCD and enter quantity 12 for 12 widgets. So even if I entered all 400 plus supplier bills, I would have to go back and correct thousands of sales orders. I've also tried to do quantity adjustments but that creates inventory shrinkage amounts that aren't accurate. Is there a way to completely remove the Inventory Shrinkage number so it doesn't show up on any financial statements? The accountant has just been using journal entries to correct the dollar amounts. However, my client wants to now start actually tracking the inventory so the numbers need to be accurate. Are there any inventory experts out there who could make this easier on me by way of journal entries or something in Accountant Tools I don't know about? I've already spent several hours trying to figure out a way to correct this disaster. Perhaps, it would make more sense to start a new QBO file altogether...
I'm glad you've been able to identify this issue. Organizing a messy inventory can easily get overwhelming, so it's great to see how you're approaching this. Shrinkage and costs of goods sold communicate directly with the inventory asset, so it's crucial to make these corrections appropriately. To ensure your books always balance, the easiest way to disable inventory is to manually adjust each item to zero.This isn't something I can recommend, as special considerations will be necessary to clear out the inventory asset and shrinkage accounts. If you'd like some real-time assistance with this, feel free to reach out to an agent using one of the following options. They'll be happy to help sort this out.
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Hello @treana ,
I feel your pain. Here's what I suggest:
1. Make inventory adjustments to bring all inventory item counts to 0.
2. Make adjusting JE's to adjust the accounts to what they need to be, presumably inventory values would come to $0.00. (this may have to be done after steps 3 & 4 but before 5 so you get the account balances all the way you know they should be).
3. Do a thorough physical inventory count.
4. Enter inventory adjustments to match physical inventory count and value.
5. From that date, begin entering all bills (after the date of your count) with item details, ensuring qty and rate are entered.
Thanks for your reply. I have the following questions:
1. So I would do this in closing off 2019 as this is before we want to actually track inventory?
2. Can you be more specific about which journal entries would need to be entered? This will impact Inventory Asset, Inventory Shrinkage and Cost of Goods Sold?
3. This has been done.
4. Would I use January 1, 2020 as the date for this?
5. I've already been entering purchase orders and bills for 2020, will this be ok?
I appreciate any and all advice. I'm not an accountant and I haven't worked with inventory systems before.
Hello @treana ,
1. So I would do this in closing off 2019 as this is before we want to actually track inventory? I would say so.
2. Can you be more specific about which journal entries would need to be entered? This will impact Inventory Asset, Inventory Shrinkage and Cost of Goods Sold? Since you said your external accountant had been making JE's to account for these GL accts anyways, you presumably know what the balances in these accounts should be at Dec 31/19. You would make sure you have a record of this on paper, i.e. Trial Balance. Then you make the inventory adjustments to bring all the inventory to QTY and value according to your physical inventory count at year end. Once you do this, these GL accounts will likely be out of whack. So you would make the necessary JE's to bring the balances back to what you know they should have been at Dec 31/19. Obviously the inventory adjustments and JE's should all be dated Dec 31/19, and marked as adjusting entries, if you are able to do that. It might only be in Accountant's version . . . sorry, not sure.
3. This has been done.
4. Would I use January 1, 2020 as the date for this? Only if your December books have already been closed by your accountant. See my notes above. If you can't use Dec 31/19, then yes, use Jan 1/20.
5. I've already been entering purchase orders and bills for 2020, will this be ok? It should be. Just make sure you run all your "pre-adjustment" reports are as at Dec 31/19 as mentioned above, so you achieve the correct balances in your inventory and COGS accounts as at Dec 31/19. Your goal is to get your inventory counts and values to line up with your year end physical inventory count. It's only because the inventory wasn't being tracked properly before that it will take a combination of adjusting inventory and JE's to bring the accounts into line as at year end.
Best of luck - hope this helps.
The more I think about this,
Thanks so much for your answers. I think my only issue is going to be what to do with the Inventory Shrinkage number once the inventory adjustments are made, The Inventory Shrinkage number will somehow need to completely disappear from the books as the dollar amounts will already be accounted for in the cost of goods sold via the bill payments. Any idea how to resolve that?
The Inventory Shrinkage account in QBO is already a COGS type of account, so it will show up as a reduction or increase of COGS. You may want to Make the Inventory Shrinkage account a sub-account of the major COGS account. That way you will have an overall total of the two in the top level account but can see exactly what was posted to Inventory Shrinkage.
The other thing you can do, which i think is most common, is to create an expense account for Inventory Adjustments, which will show up in the expense section of the P & L. That is usually where adjustment numbers go. If for any reason you want to keep it all in COGS, then follow the first paragraph.
Personally, I don't like the name 'Inventory Shrinkage' for an account. It almost implies that the inventory shrunk of it's own accord. Whether you decide to keep the adjusting account in COGS or expense, I might suggest renaming it to Inventory Adjustment rather Shrinkage. I know, it's semantics. I'm just picky that way :)