Inventory background ADJ posted automatically to expense account in Inventory Vendor Bill Entry

Thank you so much!  The mystery is solved... now I know to expect this when quantities dip below zero.  Appreciate the help!

I purchased inventory and accidentally coded it as expense on the bill instead of coding to the item.  This caused my inventory to go negative as I sold the items.  The bill is dated prior to the sales invoices.  If I correct the original bill from 2 years ago to show the purchase of the item (instead of expense), will QB automatically recalculate the subsequent sales transactions for the correct cost and change my last year's income statement?  It's affecting many sales transactions that happened after the purchase bill.  If I correct the bill to code to the item, it will also fix my negative inventory, but I'm afraid what it will do to my historical records.

Hi there, KrisD.

You can try to correct the bill and code it the item. Then, check if it fixes your inventory.

If not, you can adjust the quantity on hand to correct the inventory count. First, you need to create a separate account in your chart of accounts to track your adjustments.

Here's how:

1. Go to Company,  then Chart of Accounts.
2. Select the Account ▼ drop-down, then New.
3. From the Other Account Types ▼ drop-down, select Cost of Goods Sold.
4. Name this account “Inventory Adjustments”, and then Save and Close.

Once done, here are the steps on how to adjust the inventory.

1. Go to Vendors
2. Select Inventory Activities, choose Adjust Quantity/Value on Hand.
3. Select Inventory, then Adjust Quantity/Value on Hand
4. From the Adjustment Type ▼ drop-down, then select Quantity, Total Value, or Quantity and Total Value. Choose the adjustment type option and then select your adjustment account.
5. Enter the Adjustment Date.
6. From the Adjust Account ▼ drop-down, then find the adjustment account you set up.
7. Add Reference No. You can also assign a customer, job, or class.
8. Select Find & Select Items. Select the items you want to adjust. If you have a lot, search for any product in the Find field.
9. Select Add Selected items.
10. Add a new quantity or new value (or both) for each item, then click Save and Close.

You can then take a look at your inventory status reports and make sure everything looks good.

1. Select Reports and then Inventory.
2. To check your product’s value, select the Inventory Valuation Summary. To check your product’s quantity, select the Inventory Stock Status by Item.
3. Look for the items you adjusted and make sure everything is correct.

Upon sharing this, It’s best to reach out to your accountant for advice before you adjust inventory value. If you don’t have an accountant, we can help find one near you.

I'm adding this article to to learn how to compute for the average cost and know which report will help with inventory management : Understand inventory assets and cost of goods sold tracking.

Don't hesitate to click the Reply button below if there's anything else you want to add. I'll be around to help you.

Thank you.  Do you know if QB automatically recalculate the COGS on subsequent sales transactions for the correct cost and change my last year's income statement? 

You're always welcome, @KrisD. I know what to do so QuickBooks automatically recalculates the Cost of Goods Sold.

You can enable Automatic Cost Updates by navigating to Preferences. Thus, when a transaction is created, the item cost is automatically adjusted. I'll walk you through how:

1. Open the Edit menu.
2. Go to Preferences.
3. Hit the Items & Inventory menu.
4. Go to the Company Preferences tab, and select the Automatic Cost & Price Updates button.
5. To know how QuickBooks will handle it if the item cost changes on a purchase:
   • Always update item cost
   • Never update item cost
   • Ask about updating the item costs. (Choosing Always or Ask, will cause QuickBooks to update the Cost filed in the item setup window.)
6. To know how QuickBooks will handle it if the item cost changes on a purchase:
   • Always update sales price
   • Never update the sales price.
   • Ask about updating the sales price.
7. Lastly, hit Ok.

Additionally, you can set it up to automatically update the Cost amount of the item if it changes on a purchase.

However, if you're still seeing a high price listed, it implies that there isn't an established average price for the product. Purchases of the item, quantity, and total cost of that quantity contribute to the establishment of average cost. You can make a change to these things as a workaround. If you entered these things but did not use them in a transaction, you can remove the item and create it again and enter the appropriate amounts.

1. Open the Lists menu.
2. Click on Item List.
3. Select the Activities drop-down.
4. Choose Adjust Quantity/Value on Hand.
5. Fill in the right information then check the Item Info After Adjustment at the bottom-left of the window.
6. Hit Save & Close.

If everything is good, feel free to check out these handy articles to better understand how to handle inventory costs:

• Average Costing vs FIFO: What’s the best way to analyze inventory costs?
• Understand Inventory Assets and COGS tracking.

Keep in touch for more help about this topic or QuickBooks as a whole. It's our pleasure to assist. Have a nice day and take care!

@KrisD  RE: If I correct the original bill from 2 years ago to show the purchase of the item (instead of expense), will QB automatically recalculate the subsequent sales transactions for the correct cost and change my last year's income statement?

Yes, when you change transactions in the past that use inventory items, the change will 'ripple forward' and COGS will recalculate on all the future transactions.

RE: Do you know if QB automatically recalculate the COGS on subsequent sales transactions for the correct cost and change my last year's income statement? 

Yes, all future transactions' GOGS will update which will change your financial reports including the balance sheet and income statement.