An entry was created adjusting the the cost of an item by it's average cost

I appreciate you coming to us with your question about the adjustment entry created for your item's average cost in QuickBooks, Lbenioff. I see how important inventory costing is for your business, and I'm here to guide you and address your concerns.

QuickBooks has made an automatic adjustment entry to ensure the accuracy of an item's average cost. This is due to the item's actual cost in the transaction being different from its average cost. This is to adhere to the first-in, first-out (FIFO) cost flow assumption, which is a method to determine the cost of goods sold. In a FIFO inventory system, items sold are assumed to be the oldest items in stock. Therefore, the system needs to track and adjust the cost of items to guarantee that the inventory and cost of goods sold accounts are precise.

Other items in the COGS report whose cost differs from the average may not have the same adjustment entry because their cost deviation may not reach the threshold to trigger the system to make such an adjustment. Aside from this, it may also be due to other factors such as the item's receipt into inventory, whether its cost was manually adjusted, or whether other transactions have previously affected its cost.

However, to prevent any future adjustment entries related to the item's average cost, you may consider the following suggestions:

• Check if there are any manual cost adjustments made to the item that caused the deviation from the average. If so, review the reasons behind the manual adjustment and adjust your inventory costing procedures accordingly to avoid inconsistencies.
• Review your inventory costing procedures regularly to ensure that all adjustments made (whether manual or automatic) are appropriate and accurate.
• If you have any further concerns or questions about the inventory costing and adjustment entries in QuickBooks, consult with an accountant or QuickBooks ProAdvisor for assistance and guidance.

Lastly, I've added these articles as additional references about ways to understand inventory costs:

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

We understand how crucial it is to have accurate inventory costing, and we assure you that QuickBooks is designed to help ensure your inventory and financials are precise. If you have any further questions or concerns, you can leave a message below. We're committed to providing you with the best support and guidance possible.

Thank you for the quick response.  I understand the concept of FIFO.  I actually carry very little inventory, but instead order an item as needed and sell it.  For this item I was able to correct the issue by changing the date of the invoice which preceded the bill (inventory increase).  However, I have another situation that also had the invoice date prior to the bill, but changing the Invoice date did not correct the issue.  To be clear I had none of these items in stock as seen in the picture below. The last ones I sold were in Oct of 23. 

So why is QB adjusting the cost?

I appreciate you for your prompt response, @lbenioff. Let me provide additional information about the invoice date prior to the bill.

QuickBooks Desktop (QBDT) is adjusting the cost of the item based on the average cost because the average cost is set as the default cost method for inventory items. This is how QuickBooks helps maintain accurate inventory values.

To verify this, you can go to the item's Settings and check the cost method. If it is set to average cost, then QuickBooks will adjust the cost of the item based on the average cost.

As for the issue with the invoice, it is possible that the item's cost was adjusted after the invoice was created, which caused the difference in cost. You may refer to this article for detailed information: Fix negative inventory issues in QBDT. 

The average cost is based on your purchase history for the item, calculated from the beginning to date. QuickBooks will compare the new average cost to the average cost used when selling and purchasing more of the item. Therefore, QuickBooks will make an adjustment entry to both the inventory asset and COGS accounts.

Changing the invoice date will not correct this as the cost of the item has already been adjusted. To prevent this issue in the future, make sure to update the cost of the item before creating any invoices or bills that include it.

Additionally, you might want to refer to this article and learn how to track discrepancies in the Inventory Asset account: Balance Sheet and Inventory/Stock Valuation reports show different amounts for the Inventory Asset a...

I'd be glad to assist if you have additional questions about inventory adjustments in QBDT. Have a good one.

@lbenioff 

The issue appears to be due to negative inventory.  Since you can't sell what you don't have, QB uses the average cost of the last item sold for the oversold items.  But, that's just an estimate because you haven't entered the cost for those items yet.  When you bring in the oversold items on a bill, QB makes an adjustment to determine the correct COGS based on the difference between the estimated COGS at the time the invoice oversold the items and the actual cost entered on the bill.  Those adjustments are what you're seeing.