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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Is there a way to print an inventory adjustment?
Kandace: That depends on what you are looking for. If you want to see a report that shows all of the items adjusted in the same transaction (if there are multiple items), then “no”. You can right click on an item in the item list and select the “QuickReport” to see all adjustments for a particular item…
Thanks for the info Charlie.
I have been adjusting inventory qty and value by hand with no problems until today, which is the first day of my new fiscal year. If my inventory said 5 and I really had six I was writing new quantity 6 but QB was writting total 11! instead of just adjusting the new. Does anyone knows what the problems is?
Francesca, did you enter the NEW value as 6, or did you say the DIFFERENCE was 6?
I have a tea business. I purchase tea by the pound(bulk) and then package it into saleable units (1.1 ounce/unit). In QB I enter the inventory purchased as $/ounce. What I would like to know is how I’m supposed to account for the labor/burden/packaging/labeling that is added to the finished good. For example, I have 160 ounces of tea at $1/ounce. I will convert this into roughly 145 packages of tea which will then be valued at say $1.40 per ounce. When I create a finished good, will QB automatically deduct the Raw Material and convert to Finished Goods so that I properly account for my inventory at the end of the day? I plan to value my finished product by another unit of measure (1 unit or item). In other words, I will convert 160 units (ounces) to roughly 145 units (FG). Any thoughts on how to do this efficiently/effectively.
Thank you.
Mr Tea: A bit off the topic here. Assuming you are using Premier or Enterprise (you don’t state what you are using), you can create the finished good as an inventory assembly item. You can then create a bill of materials for the item and add your raw materials, as well as packaging and labeling. You can add burden – an estimate of your labor and overhead, if you wish. Then when you build the assembly all that is rolled into the assembled item. There are other articles in this blog about manufacturing issues.
ok i am using pro. What is the diff between Pro and Premier?
Lot’s of differences, too many to list. The basic program is the same as Pro. You have more options. The one that is appropriate here is the “inventory assembly” item, which allows you to create a part list for an item and issue “build” transactions. You can read about this starting at http://qbblog.ccrsoftware.info/2008/04/quickbooks-manufacturing-tutorial/
You also get a “sales order” order type, which is very useful.
Lots of other nice things – I generally don’t recommend Pro for any business that is building or selling things, Premier is better suited. But, then, it is more expensive.
I made a mistake entering a new inventory part with a bill. When creating the new item, I filled in the quantity section. Apparently this was a mistake, and I should have left it blank to fill in automatically when the bill was entered, because I now have double the quantity I should have. I can’t figure out any way to change this number other than going to “adjust quantity.” The problem is the adjustment account. I don’t really want this adjustment recorded at all since it was just a data entry error, but even so, I have no idea what account to post it to. None of them seem appropriate and I don’t want this recorded as an expense that affects my P&L. Please help!
Julia, you have two transactions entered for the item. One from when you added the new item with a quantity, one from the bill receipt. You need to delete one of them, not make another adjustment. Right click on the item in the item list and select the “QuickReport”. Set the date range to “all”. You will see the transactions. One is an adjustment, the other a receipt. Double click on the adjustment to open the window, confirm that it is the quantity you expected, ctrl-D to delete. No more duplicate…
Hi Charlie,
Very good Blog. Congratulations! We buy inventory parts for resale and receive a discount on the entire order. The bill comes in with all the items at the “current” cost, and then there is a line item discount, let’s say 5% off. Is there a way to spread the discount across the items being received? This will give us a truer average cost for the items. We are posting the discounts to a COGS account. This gives us a real number for COGS, but it’s not adjusting the cost of the item on the Inventory Asset Account.
Thank you,
Omar
When you do the receipt you can manually figure out what the discounted receipt cost is, and use that instead of the “real” cost.
Or you can do a “value” inventory adjustment against that COGS account to reduce inventory asset by that amount
Hi Charlie, sure hope you can help me, as I have searched and cannot find an answer for my particular situation. I am using QB Pro 2009. We are a small door manufacturing company, in business for 1 year. Every inventory item I have is loaded in respective accounts as “COGS” on the cost side, “Sales Income” on the sales side, and “Current Asset” under the Inventory Info. We purchase approx. 60 items for inventory such as hinges, screws, thresholds, doorsweeps, etc. Larger doors & glass are input as non-inventory items because they are ordered specifically for a customer. We do not use assembly items. We were told by a CPA in our first month of business, that we could do a quarterly or yearly adjustment to our inventory, but I cannot figure out what adjustment account to use as the adjustment is neither a loss – an expense, or a gain – income, since the items were used for customer jobs and we did receive income from those items.
Hope this makes sense to you. If there’s a better way to set this up, I am open to suggestions. Thank you so much for listenting. Kathy
Kathy, that is a bit hard to talk about in comments in a blog like this. I’d need to know a lot more about how you are using QuickBooks. Your CPA should be able to tell you exactly what adjustments to make. I would need to knwo if you are talking about the inventory items or the non-inventory items, how you are using the items you buy, how you are handling the items you sell, and more. Lots of detail before I can give you much direction.
Hi Charlie,
I have a client who created inventory items for all his items instead of creating “non-inventory” items (which would have been more appropriate).
He uses his items to invoice customers but when he makes purchases from vendors he posts on the expense side rather than the item side and has the expense pointed to his cost of goods sold account.
When creating his items he entered the “purchase price”. Which from what I can tell when he sells an item it is also posting to the cost of goods sold.
He now has negative quantities for his items and a negative balance in his inventory asset account.
How would you suggest this I fix this?
I know what I need to do going forwards; I am just not sure about how to fix it for the past year.
What do you think?
Jennifer, that is a bit complicated to discuss in this format. And I’m not a CPA. And I don’t have enough details. If they posted to COGS directly when purchased, AND they sold the inventory asset items, then they are posting to COGS a second time (the COGS account in the item record is posted to when there is a sale). But, if there is no “value” or cost of the items, then the posting to COGS from the sale may be zero? I’d have to see those transactions to see if a value is there, and if so then you would have to look into doing an adjustment to move the quantity back to zero and post against that COGS account, probably. But that is just a guess, without seeing the actual file. Make a copy of the file before you do any posting!
Hello, all – Just discovered this site, and I have a question related to this topic. I am a small online retailer, in the process of converting to QB Pro 2008. I was working with a CPA who has now retired, so I cannot ask him my last few questions.
Long story short, per his advice, I entered all purchases of inventory items against “Purchase for Resale”, which was set up as a COGS account. I have now created all the individual inventory items with zero quantity and a good average cost, and I have just completed a physical inventory, so I know how many of each item I physicall have in stock.
Our next step was that he was going to show me how to get the $$ out of Purchase for Resale and into the various respective items. It looks to me like I could do this using the Adjust Quantity/Value transaction, but I’m not sure what goes where, and I don’t want to get it wrong, as I will be doing this for well over 100 inventory items.
Let’s use a hypothetical example – say I have actual QOH of 15 for Red Widgets, which have an average cost of $6.00 each, and I have 10 Blue Gizmos, which have an average cost of $5.00 each. And again, the purchases originally went to the COGS account “Purchase for Resale”. How would I move $90 from “Purchase for Resale” to “Red Widgets” (qty 15 * avg cost $6.00) and $50 from “Purchase for Resale” to “Blue Gizmos” (qty 10 * avg cost $5.00)?
And lastly, if after moving most of the $$, I end up short in Purchase for Resale, that is, not enough dollars left in it to be moved into the remaining item(s), what should I do? And same question in reverse – if I end up with too much $$ in Purchase for Resale, that is, I’ve moved everything into individual items and still have $$ in the resale account, this would most likely be due to “shrinkage” or theft, and how would I get those remaining dollars out of Purchase for Resale, which should be zero balance when I’m done?
I am really regretting that we didn’t take the time to get all of this entered correctly at the time! I am not very concerned about having the transaction dates being now versus earlier, as I don’t need the inventory data for prior transactions, but I’m concerned that I may mess other accounts up big time if I don’t do this right.
Thanks,
Sue
Sue, I hate to say this, but I’m not sure that I can help you in a few comments in a blog like this. One problem is that I’m actually “on the road” and out of the office, so I have limited time to look at the blog. Another is that I’m not a CPA so I don’t like to give very specific answers like what you need without having my hands on your system. In a very general sense, inventory value adjustments are what you probably need. If you are expecting to move ALL of the cost from the purchases account, then if you find that you “overdraw” it, that amount has to then be adjusted off against an expense account like “shrinkage” or “loss by theft”, etc., with a journal entry (not an inventory adjustment).
Make a copy of your file, play with things, if you don’t like the results then restore that backup. And perhaps get a local ProAdvisor who can look at your actual files and give you informed answers.
Hi (excuse my English),
What a long discussion (some related and some related in a way…).
After reading through Adam’s (the vineyard), Jason’s (wet lumber) and Mr Tea ($/ounce), and a post http://qbblog.ccrsoftware.info/2009/03/shipping-costs-and-quickbooks-inventory/ , felt that I got the same issue and was hit by the feeling of sometimes……haaaa I got it and sometimes….are you sure ? dilemma.
My story:
I’m a transport company that purchase sand and deliver to my customers. I bill my customer one amount that includes the (sand cost + small markup + transport fees + moving up and down the lorry). The inventory works fine and very pleased with Quickbooks Premier 2008 Asia version.
Now:
I won a tender from my government that enables me to mine (? or sand mining operation) my own sand and pay the government the royalties on the sand. The mining operation will incur various costs relates to the mining process.
It seems that now, I’m not buying any sand from anyone. How to enter into quickbooks the inventory quantity from the mining process and the cost/value.
Thanks all.
Thanks Charlie for a great-great blog.
MNHarun, I’m not an accountant, so I’m not sure what the best would be. Also, accounting practices as far as costing (etc.) of these kinds of resources are usually governed by laws in your country – and will vary from one country to another. This kind of thing is way over my head. Sorry…
I have a several questions. We are currently using Quickbook program. I am facing following problem. Can you give me suggestion? Our inventory items are locating in different places. In other word, we have several warehouses. How can i use Quickbook for moving items from one warehouse to the another? And if one warehouse sell our item, how we should enter sales receipt?
thank you
Inkhy: That is a bit off topic, and comments in a blog article like this aren’t a great way to answer those kinds of questions. There isn’t a great answer for multiple warehouses without using an add-on product. You can use “subitems”, where you create an item “warehouse A” and “warehouse B” and then assign items under that. Then you can use adjustments to move items from one to the other. That might not work in all situations, though.
I am designing handbags and producing it by using subcontract labor. Dan mentioned that he uses a 3rd party program that helps him to track inventory, cost of the item, etc. What is that program? I would like to try one. I have 2009 Mfg Premier, and thinking of trying to keep very detailed inventory outside of QB.Thank you.
I have lets say 10 bags (build in my inventory). I am giving away 1 bag for marketing purposes. What is the best way to process this transaction in 2009 mfg premier QB? Do I adjust quantity by 1 and click ‘value’ as well since the value of my inventory will be reduced by the cost of that 1 bag, OR just leave the value box along and adjust quantity by 1? It is my understanding though that the average cost of other 9 bags will increase if I do not use value adjustment box. Thank you.
Diana, I don’t know that Dan was using an outside program (didn’t see that reference) but there are several available. HOWEVER, please note that these are all (to my knowledge) fairly expensive programs, more expensive than QB itself. And some require that you use Enterprise…
For the adjustment question, if you are removing an item for marketing purposes and you want to use an adjustment, do NOT click the “value” box. You don’t want to adjust the average cost of the items, you just want to expense out that one item. Pick an account to post to that is something like “promotional expenses”. A regular adjustment will remove the cost of that item from inventory asset and post it to that expense. It will NOT adjust the average cost of the remaining items. That would be the typical approach to take.
how do i setup the inventory adj account. i have enventory with a negative number and i need to fix . it ask me for and income or expensive account.? ok, need help.
thanks
Teya, I can’t give you s specific answer. The question is “why is it negative”? Is it because you haven’t been receiving the item correctly? Is it because you have some sort of problem with theft, loss, poor quality, scrap, or what?
We import wines from a range of different countries and purcahse in different currencies. Some slow-moving expensive wines are now significantly more expensive to purcahse today (due to currency changes and supplier price) than our book value shows our current stock. It makes sense to me to adjust the item value of the stock which we have on hand to better reflect current purchase cost/value.
Is this a reasonable scenario to proceed with inventory valuation? Would we set up an income account for these adjustments as we are increasing the value (not qty) of our stock?
Thanks, Graham
Graham, I’m not an accountant or bookkeeper so I’m not qualified to give you advice here. You can use inventory adjustments to change your inventory valuation, but you have to post that difference in cost somewhere. You need to talk to someone who is qualified to determine if you should do that, and how to handle the financial implications.
Graham – You can adjust your inventory valuation to current cost. I would use a Cost of Goods Sold account called Inventory valuation adjustment to distinguish it from other Inventory adjustments (for damages/losses, etc).
This will increase your Inventory asset value and decrease your Cost of Goods Sold.
Then, when you sell that item, you will be increasing your COGS account by a more accurate (higher) amount.
At year end, make the Inventory valuation adjustment (as well as qty adjustment) and be sure to review it with your accountant.