Inventory adjustment question

paulc4 · ‎June 03, 2021

Hello,

Hopefully someone can point me in the right direction.

We routinely count our inventory.

I understand that I should do an inventory adjustment but my questions are:

If we find we have more on hand then QBO shows, and that hasn’t been sold yet, which account should we post the inventory adjustment to?

Similarly, if we find we have less on hand which account should the adjustment be posted to?

Thanks,

Rochelley · ‎June 04, 2021

Hello @paulc4 ,

Perpetual inventory system adjustments are done as follows:

1. If the physical inventory count shows a higher balance than the inventory system, you must DR Inventory (Asset) account, and CR COGS (this can be a COGS type account named something like Inventory Adjustments).

2. If the physical inventory count shows a lower balance than the inventory system, you must DR COGS Inventory Adjustment account and CR Inventory (Asset).

Because of the way QBO does inventory adjustments, you simply need to go to Sales-->Products and Services-->Inventory item you want to adjust-->drop down Edit in the Action column-->Adjust quantity-->Choose your Inventory adjustment account-->Enter discrepancy in Change in Qty column. Depending on whether your total QTY goes up or down, QBO will make the accounting entries correctly in each account; you don't have to determine the DR or the CR - it is done for you.

Good luck!

View solution in original post

Rochelley · ‎June 04, 2021

Hello @paulc4 ,

It appears that QBO uses the FIFO (First-In First-Out) method of tracking inventory. So the adjustments will be made accordingly; the cost associated with the inventory that was purchased first is the cost expensed first.

Example:

If I buy 10 items at $5 each on 05/01/21 and then I buy 10 of the SAME items for $10 on 06/04/21, the first 10 items sold (or adjusted) will be costed at $5 each and the next 10 at $10 each.

View solution in original post

Nick K · ‎June 04, 2021

Hi paulc4,

Having the correct inventory is definitely a necessity but just as important is making sure you track any adjustments to the correct account. I can help point you in the right direction for this.

QuickBooks Online makes adjusting your inventory a breeze so you can focus on other parts of your business. In order to do an inventory adjustment you just need to follow these steps:

Select + New.
Select Inventory Qty Adjustment.
Enter the Adjustment Date.
In the Inventory adjustment account drop-down, select the appropriate account.
Select the products in the Product field. Note: The description and current quantity on hand auto-populate.
For each item, enter either a new quantity or a change in quantity.
In the Memo field, enter the details about the adjustment.
When you're done, select Save and close.

In order to make sure you're using the correct accounts it's recommend that you reach out to your accountant as they're trained for just this type of situation. If you currently don't have an accountant no need to worry, we got this. In your QuickBooks Online account you just need to go to: My Accountant>Find a pro to help to find an accountant in your area.

If you have any questions let us know and we'll be happy to help!

Rochelley · ‎June 04, 2021

Hello @paulc4 ,

Perpetual inventory system adjustments are done as follows:

1. If the physical inventory count shows a higher balance than the inventory system, you must DR Inventory (Asset) account, and CR COGS (this can be a COGS type account named something like Inventory Adjustments).

2. If the physical inventory count shows a lower balance than the inventory system, you must DR COGS Inventory Adjustment account and CR Inventory (Asset).

Because of the way QBO does inventory adjustments, you simply need to go to Sales-->Products and Services-->Inventory item you want to adjust-->drop down Edit in the Action column-->Adjust quantity-->Choose your Inventory adjustment account-->Enter discrepancy in Change in Qty column. Depending on whether your total QTY goes up or down, QBO will make the accounting entries correctly in each account; you don't have to determine the DR or the CR - it is done for you.

Good luck!

paulc4 · ‎June 04, 2021

Got it! Thank you!

Last question, do I need to allocate a cost under the product cost box? Or will QuickBooks take the average cost of the product and apply it to the accounts?

Rochelley · ‎June 04, 2021

Hello @paulc4 ,

It appears that QBO uses the FIFO (First-In First-Out) method of tracking inventory. So the adjustments will be made accordingly; the cost associated with the inventory that was purchased first is the cost expensed first.

Example:

If I buy 10 items at $5 each on 05/01/21 and then I buy 10 of the SAME items for $10 on 06/04/21, the first 10 items sold (or adjusted) will be costed at $5 each and the next 10 at $10 each.

paulc4 · ‎June 04, 2021

Perfect. Thank you very much for your help. I was trying to wrap my head around this for a while but it seems so simple now. Thanks again!

blacksmurf · ‎October 03, 2021

the problem i'm having is when i make the adjustment into COGS account it screws up my profit and loss report. when i initially add a new item and quantity its put into inventory assets and is sold out of that account. when i make the adjustments to the quantity its not adjusting the same account. i dont know why qb wont allow to make the adjustment within the inventory asset account. there is a flaw that it sounds like everyone is having

Rochelley · ‎October 04, 2021

Hello @blacksmurf ,

When you make an inventory adjustment, both the COGS account and the Inventory Asset account are adjusted. So yes, your P & L report will change by the amount of adjustment to COGS, since COGS are on the P & L, and Inventory Assets are on the Balance Sheet.

When you initially add a new item, the quantity and $ value is put into Inventory Assets. You are right that when the item is sold, it is sold out of that account. But at the same time that it removes the item from inventory, it adds the cost $ value to the COGS. You simply cannot make a sale or adjustment to Inventory and not have it post to the COGS as well; that is by design and is operating correctly.

Perhaps I'm not understanding your question; if so, please give an exact scenario of what you are trying to do and then we'll have a better idea of what's going on.

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Inventory adjustment question