An important part of controlling your inventory is to make sure that your company financial statements match your inventory status. The inventory asset balance in your Balance Sheet should match the value in the Inventory Valuation Summary report. Unfortunately, these values don’t always match, and in this article I’ll talk about some reasons why this can happen, and ways to reconcile your inventory balances.
If you have an inventory related business it is imperative that you maintain good control over your inventory. All too often businesses don’t pay enough attention to their inventory, but proper inventory management can make the difference between making a profit or failing. Managing inventory can be a time consuming chore, but if done properly the benefits outweigh the pain. When I work with a client who is managing inventory one of the monthly chores I set up for them is to compare the inventory asset account balance in the Balance Sheet with the total asset value in the Inventory Valuation Summary. They should match! There are several reasons why they might not.
Let’s look at a very simple test company that I’ve set up. Compare the values in these two reports:
As you can see, the balances differ.
Looking for Journal Entries
One of the most common reasons is that somebody has made a journal entry directly to the Inventory asset account. This shouldn’t be done – the Balance Sheet will see the adjustment, but the Inventory Valuation Summary won’t. To find these adjustments double-click on the Inventory Asset account in the Balance Sheet to open the Transactions by Account report. In my sample you can see that there is one General Journal entry affecting the assets (note that you can sort this report by type to arrange all of these so they are in one place).
How to correct this? Generally you should notdelete these transactions. They are there for a reason (although you should find out what the reason is, and see if you can avoid doing them). To get the reports to balance you can make another journal entry to reverse or correct the existing entry. You have to be careful to not make changes that would affect accounting periods that have already been closed or have been included in tax returns. However, in my sample, I’m going to delete the transaction by double clicking on the line to open the transaction, then pressing ctrl-D to delete it. Here are the reports after the deletion – notice that the Balance Sheet has changed and we are getting closer, but it still does not match the Inventory Valuation Summary.
The next thing to do is to look for inactive inventory items that have a balance on hand. You shouldn’t hide an inactive item if it has a balance on hand – it isn’t truly “inactive” if you have some. The Inventory Valuation Summary won’t include inactive items, but the Balance Sheet will still include the value of any you have on hand. If we click the include inactive box on the item list, you can look for any inactive items with a balance on hand. As you can see, we have one item that fits this description.
If we make this item active, you can see that the reports now match.
QuickBooks is very date sensitive. It reports values and quantities based on the dates of the reports and the dates of the transactions. It also is very forgiving when entering dates – you can easily give a transaction a date in the future. This can sometimes cause problems if you are not careful with how you handle dates in reports.
Look at these two reports. Note that the asset values don’t match:
Note that the date ranges on the reports don’t match. The reports are generated on 4/1/2009, but we have a date range of all for the Inventory Valuation Summary. As I’ll show below, the reason is that there is a transaction dated in the future which is showing in one report but not the other. The simple answer to this is to make sure that both reports use the same date selections.
This brings up another common question that I often see – why does the Inventory Valuation Summary show a different quantity on hand than the Item List?
This also is a report date issue. Note that the Item List is not date sensitive, it shows all transactions. So we have a similar situation – the Item List balance has a future dated transaction, the report’s date probably doesn’t include that.
If I right click on the item in the Item List and select the QuickReport for the item, and set the date range to all, you see that we have an item receipt dated a week in the future. This shows on the Item List but not on any report that doesn’t look to the future.
This covers the most common situations you will see. If anyone has other situations that can cause imbalances, let us know!
About the Author (Author Profile)
Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70’s, focusing on inventory and accounting software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor. Look for Charlie’s articles in the Accountex Report blog, as well as his California Wildflower Hikes blog.