QuickBooks Inventory Quantity and Value Adjustments
If everything is working perfectly in your QuickBooks company you won’t need to worry about making inventory adjustments. You will receive inventory items, sell inventory items, possibly even build inventory items (assemblies), and everything will balance out. If that describes your company, great! For the rest of us, though, there are times when we will need to make inventory adjustments. The most common question I run into here is “do I make a quantity or a value adjustment?”
When to Adjust
There are a lot of reasons why you might have to make an inventory adjustment. For example:
- Damage or Theft: You can lose items if they are stolen, or if they are damaged in an accident or catastrophe.
- Physical Inventory Adjustments: You may count the items that you have and find that there is a discrepancy between your count and what the computer says. Variations don’t always indicate a problem, it could just be a low cost bulk item that you don’t have to control very tightly.
- · Data entry errors when you start up a new file
These are just a few examples, there are hundreds more. If you find that you need to change your count, or the value of your inventory, you need to make an inventory adjustment.
To make an adjustment you can select Vendors, then Inventory Activities, then Adjust Quantity/Value On Hand. Alternately, from the Item List, click the Activities button and select Adjust Quantity/Value On Hand.
The Adjust screen is one of my least favorite screens in QuickBooks. It allows you to enter adjustments for any or all of the inventory part and inventory assembly items in your item list. If you have a small list like what is shown here, it isn’t too bad. If you have hundreds or thousands of items it can be very difficult to work with, because it does not provide you with an easy way to locate a particular item.
A few key things to point out here:
- The adjustment date is critical. Any adjustment you make takes place on this date. If you are increasing items, they aren’t available until this date. If you enter a date in the future you won’t be able to use these items in a transaction that has an older date. If you use a date in the past then QuickBooks may adjust your Cost of Goods Sold values (if you are making a value adjustment), and if you are going back to an earlier accounting period that might not be a good idea.
- The adjustment account is important in several ways. Obviously, any financial effects of your adjustment will be posted to this account. Less obviously, if you are trying to find an adjustment that you already entered, the previous and next buttons will only scan you through the adjustments for the account that is showing here. That can be frustrating if you are trying to find an adjustment and you can’t remember which account you used.
- Value adjustment is checked if you are making (big surprise) a value adjustment. This has a major impact on how the adjustment affects your financial statements – I’ll discuss this in more detail below.
Quantity Adjustments
If the value adjustment box is not checked, you are making a quantity adjustment. The window appears as I’ve shown you above. This is the most common kind of adjustment that you will make in QuickBooks. You will use this to adjust the quantity of the items you have on hand.
I had 10 of the shade item on hand, but one was damaged in a storm. I enter either the new quantity and let QuickBooks calculate the difference, or I enter the difference and let QuickBooks calculate the new quantity.
QuickBooks is a double entry accounting system, so the adjustment is always going to balance a change in the inventory asset account against the account that you select. In this example this is a decrease in the quantity that I have on hand. That means that my inventory asset account (as specified in the item record) is reduced by the average cost of the item multiplied by the adjustment quantity, and that value is moved into the adjustment account I specified. In this case, I picked an expense account for damages. Most common adjustments are going to involve an expense or COGS account, usually.
Why do you need to enter an account to post against? Well, you can’t just add or subtract inventory items without some explanation. Changing the quantity will change the value of your inventory assets. If you are removing inventory because someone dropped an item and broke it, you have to reduce the value of your inventory (the inventory asset account) and then offset that in some matching account, such as a “damaged goods” expense account.
The keys to remember here are:
- The quantity is changed.
- The accounts are adjusted by an amount equal to the quantity multiplied by the average cost of the item. You are adding or subtracting value in your inventory asset account, and offsetting that in an expense or other kind of account.
- The date is critical, because you may be changing the balance on hand for a date in the past. This can change inventory valuation calculations, turn “build” transactions into pending builds, and more.
Value Adjustments
In the normal course of business it is unusual to make a value adjustment. I’m not a CPA or tax accountant – you should talk to your advisor before making this kind of adjustment. Usually when I see someone trying to make a value adjustment it is because the either don’t understand what is going on, or they are trying to correct an error that should actually be corrected by finding the original transaction and correcting the error there.
When you check the value adjustment box you can now enter not only a new quantity, but a new value for this item.
This kind of adjustment will change the average cost calculation for the items you adjust. QuickBooks will take the new quantity, the new value, and calculate the new average cost by the following formula:
Avg cost = (original value + difference in value) /adjusted qty on hand
In some ways this is the equivalent of hitting the QuickBooks inventory valuation system over the head with a baseball bat. You are (potentially) revaluing your inventory – creating (or losing) value in your inventory asset account AND recalculating the average cost of the items you are adjusting. This may be tempting, but I recommend that you do NOT do this unless you are really sure it is what you want.
If you feel that the average cost is not correct, you can enter a new value for the item. Note that the difference in the value is going to be posted to the inventory asset account and the selected account in this transaction. You can’t just create (or lose) inventory value, you have to post it somewhere.
Again, if you think that there is an error in your inventory valuation, it is probably because you have an error in an item receipt. Find that item receipt and correct the problem (if it is fairly recent), rather than making this adjustment.
The date is VERY critical here. You are changing the average cost of the item on the date you have entered. If this is a date that is in a prior accounting period you could be changing your financial statements, and that might not be a good thing to do.
Category: Inventory
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 QuickBooks and Beyond blog, as well as his California Wildflower Hikes blog.
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Thank you, Laura. Note that Laura provides QuickBooks and bookkeeping advise (for a fee) – see http://www.centsablebookkeeping.com/
I refer clients to her often, she provides excellent service.
Charlie we import and resell products. We were using simply accounting but swithced to quickbooks premier 2010. We are small so we are in the process of reloading everything for 2010. In carrying over 2009 inventory we failed to fill in inventory cost. So we have for Jan to march inventory volume but no value. We have reloaded everything up until June and would not like to have to start over again.
You said “In the normal course of business it is unusual to make a value adjustment”
What do you suggest. Thanks for your help
Kim, I can’t give a specific answer without seeing your data. Yes, I said “in the normal course of business”, but this isn’t a “normal” situation. It is possible that you could do a value adjustment to get everything back to what it should be, IF you know the proper values.
Another possibility – if the ONLY time that you were missing costs was when you entered the carryover transactions, you could go back and edit those transactions to add the cost value. I can’t tell if that would work for you or not.
There are a number of variables here.
Hi Charlie, I love your site, thanks for all the help you provide! I have a couple of questions in my mind as a result of reading all the prior discussion.
1) The earlier question from Diana about using the inventory adjustment to accommodate a bag to give away for marketing purposes was curious to me. It seems a lot easier to do it that way as opposed to what I’ve been doing. In the past, for a transaction like this or a charitable donation, I’ve always posted the transactions required to essentially sell the item from the business to the business with the customer set to business use. The form of payment ultimately ends up posting to the donation or marketing expense account. Obviously this approach requires a lot more transactions to deal with versus just doing an inventory adjustment posted to the right expense account. Is there any difference in the underlying accounting that makes my burdensome approach different?
2) I’m using Pro version so I’m having to do a little hokey workaround to use inventory adjustments to build an “assembled” handmade craft item for sale. All the raw materials are entered as negative inventory adjustments. Value adjustment is not checked. Once all the raw materials were removed from inventory, the “Total value of adjustment” amount at the bottom of the screen showed me the valuation of that build which I then used to calculate the cost of the handmade items. Since I built 10 items, I divided that “Total value of adjustment” amount by 10 to arrive at the cost of each handmade item. Then I went to the item list for the new built items and entered the cost per item to be that calculated cost. In the same inventory adjustment transaction I adjusted the new item quantities to +10. The “Total value of adjustment” amount then dropped down to $0.00. This is what I would expect and think I desired since I didn’t want to change any valuation, just wanted to reposition it from the raw materials to the finished products. Am I overlooking damage I’m doing to the underlying accounting by doing it this way? I’ve got the Adjustment account set to a COGS account, but since there is a net $0 for the transaction, does it matter what this is set to?
Thanks in advance!!
I just had a delayed reaction… I remember now that the reason I was doing my burdensome approach in #1 above was because I had to account for use tax and it was the only way I could automatically calculate and keep track of it throughout the transaction. I guess you can ignore my #1 question unless you have a suggestion for accounting for Use Tax while doing the inventory adjustment approach. Still looking for validation or criticism for my #2 question, though! TIA
Karen, not being an accountant, AND not having hands on your file, I’ll not go into the “use tax” issue. That is always complicated, and there are many different approaches depending on what your local regulations are on this kind of tax. That goes way beyond what I can answer in comments like these. Most likely an inventory adjustment isn’t what you want here, but that is an open question.
For the second item, essentially what you are doing is OK from what you describe. If you are entering a transaction for just one type of item – quantity 10 of one particular item, after you enter the component costs and then get the total value at the bottom, you shouldn’t have to do any dividing. Just post that total amount to the appropriate quantity of the finished product. You can do it all in one transaction. As you say, it doesn’t matter what account you use as it is a zero net transaction, but I wouldn’t normally use a COGS account. I would use an other asset account myself, one set up only for this. You are moving asset value from one item/account to another. Note that if you upgrade to Premier you can save yourself a lot of trouble, as then you have the Inventory Assembly item type and that takes care of all of that for you easily.
Charlie. I just completed a physical inventory of about 300 line items. Now, how do I enter the QOH into QB? Is it through Adjust Qty/Value on Hand? Thanks for your reply in advance.
Dipesh: Yes…
Kathy/Jennifer, my situation is very similar to both of yours(only for furniture not doors). Did you ever find a solution?
Charlie, I think we are referring to the non-inventory items since those are ordered as needed but are showing as negatives due to poor account setup previously. The inventory of the hardware is easy to reevaluate since there will be an actually number to input whereas the order on demand items should never have gone negative to begin with. So although we can adjust the quantity deciding on the adjustment account is proving to be a elusive.
Erica, if they are negative quantities, then they are not non-inventory items. Those don’t have a quantity. If you are talking about account balances, then yes you are probably talking about an incorrect setup. There are many ways of diagnosing those kinds of things, but it really isn’t the kind of thing I an do for you via blog comments. You should talk to a ProAdvisor who is familiar with inventory issues. Or possibly get Laura Madeira’s QuickBooks Solutions Guide book (it is listed in the widget in the right column of this page).
Hi Charlie, I use quickbooks to track bar liquor inventory. Invoices are entered by inventory item and used bottles are accounted for in an inventory adjustment, thus decreasing inventory amounts. But when I take physical inventory, to do an adjustment, I may have a number such as 1.6. When I enter this adjustment, and then do a used bottle adjustment later on, I can end up with a negative inventory amount… do you have any suggestions?
If you do a physical count and adjust to the count, and then later make an adjustment that brings you to a negative level, then you either have a problem in tracking your usage or you are having a problem with loss, theft or whatever. A negative value says that you have either entered a value incorrectly (entering 16 instead of 1.6, for example), that you have missed a transaction (you forgot an adjustment when you added something to the bottle? or someone is removing inventory without recording it), that you are mismeasuring transactions (very good chance of this I would guess – you entered 1.6 but really used 1.8).
You have to determine what the cause of the discrepancy is, take a physical count of the item, adjust it to the appropriate level and to the appropriate account.
DAN-Your question was identical to the one I had – thanks so much! If you ever read this, I’d love to know what software you’re using for inventory tracking of the “little stuff” and pricing – I’m in the exact same boat as you and can’t use the Manufacturing version of QkBks due to operating system incompatibility.
CHARLIE – GREAT BLOG! Have never had more clear explanations of some really complicated concepts. I’ve bookmarked it and I’m sure my accountant will thank you for saving her the headaches
Mindy – are you using a Mac version, perhaps?
Thank you for the compliment – note that MOST of my new articles are appearing in a new blog, “QuickBooks and Beyond”, found at http://www.sleeter.com/blog/
I have a client which as of 12/31/10 had 900,000 of inventory and as of 1/1/11 the inventory stated 788,000 leaving a discrepancy of 112,000 on the balance sheet. I have recently taken on the project of fixing this and have discovered the issue. I don’t know why or how this happened as there were no transactions b/w these two dates, considering they are 1 day apart, there shouldn’t be.
How do I go back to fix this issue or how to I adjust the inventory to the correct amount so that the balance sheet balances?
Shiraz, you don’t want to adjust the inventory (most likely) without knowing what is creating the problem. It is hard to determine without having hands on your file. You don’t mention what year or product or edition of product you are using, either.
Sometimes the data is corrupted – there is a “rebuild” option that you can run to try to clean up the file. However, Rebuild doesn’t fix everything. You might find it best to work with a qualified ProAdvisor who can look at the file for you. ProAdvisors have a version of QB that has additional diagnostic tools for inventory (depending on what year of product you have).
How would I go about changing the date of an adjustment?
If it is an existing adjustment, just locate that adjustment and then change the date. Note that this can affect other transactions, so be careful. For example, if you move an adjustment out to a farther date, and that reduces the quantity on hand of an item that is used on an existing build, you could turn that build transaction into a pending build. Lots of things can change.
I need to know what I can do about inactive items still showing up on my “adjust quantities on hand” page. It makes it very difficult to keep track of items that are still active and items no longer sold. I run a flooring business and multiple items we no longer sell are still listed on that page.
Nora, I don’t see that in my Premier 2012 (US) version. What product are you using?