Saturday, October 24, 2009

Adjusting Physical Counts and Inventory Values

Inventory shrinkage, spoilage, and, unfortunately, theft all combine to reduce the inventory that you physically have. In order to record these inventory reductions, you periodically physically count your inventory and then update your QuickBooks records with the results of your physical counts.

Figure 1: The Adjust Quantity/Value on Hand window

To use the Adjust Quantity/Value on Hand window, follow these steps:

  1. Use the Adjustment Date box to record the date of your physical count.

    In other words, you want to adjust your quantities as of the day you took or completed the physical inventory count.

  2. Use the Adjustment Account drop-down list to identify the expense account that you want to use to track your inventory shrinkage expense.

  3. (Optional) Identify the customer:job and class.

    If it's appropriate, and in many cases it won't be, use the Customer:Job box to identify the customer:job associated with this inventory shrinkage. In a similar fashion, if appropriate, use the Class box to identify the class that you want to use for tracking this inventory shrinkage.

  4. Supply the correct inventory quantities.

    The Item, Description, and Current Qty columns of the Adjust Quantity/ Value on Hand window identify the inventory items that you are holding and the current quantity counts. Use the New Qty column to provide the correct physical count quantity of the item. After you've entered the new quantity, QuickBooks calculates the quantity difference and shows this value in the Qty Difference column.


    You can actually enter a value into either the New Qty column or the Qty Difference column. QuickBooks calculates the other quantity by using the current quantity information that you supply. For example, if you enter the new quantity, QuickBooks calculates the quantity difference by subtracting the new quantity from the current quantity. If you enter the quantity difference, QuickBooks calculates the new quantity by adjusting the current quantity for the quantity difference.

  5. Adjust the value.

    This window lets you enter both the correct physical count quantity and the updated value for the inventory item. You enter the physical count quantity, obviously, in the New Qty column. You enter the new updated value in the New Value column. You probably use this version of the Adjust Quantity/Value on Hand window only if you're using a lower-of-cost or market inventory valuation method. For example, both financial accounting standards and tax accounting rules allow you to mark down your inventory to the lower of its original cost or its fair market value. If you're doing this-and how you do this is beyond the scope of this book-you enter the new inventory value in the New Value column.

    Figure 2: The expanded version of the Adjust Quantity/ Value on Hand window


    Essentially, using the lower-of-cost or market inventory evaluation method just means you do what it says. You keep your inventory valued at either its original cost or, if its value is less than its original cost, at its new value. Obviously, assessing the value of your inventory is a little tricky. But if you have questions, you can ask your CPA for help. One thing to keep in mind, however, is that you can't go changing your accounting methods willy-nilly without permission from the Internal Revenue Service. And changing your inventory valuation method from cost, say, to lower-of-cost or market is a change in accounting method.

  6. Provide a memo description.

    If you want to further describe the quantity or value adjustment, use the Memo box for this purpose. For example, you may want to reference the physical count worksheets, the people performing the physical count, or the documentation that explains the valuation adjustment.

  7. Save the adjustment.

    After you've used the Adjust Quantity/Value on Hand window to describe the quantity changes or value changes in your inventory, click either the Save & Close button or the Save & New button to save the adjustment transaction. As you probably know at this point in your life, Save & Close saves the transaction and closes the window. Save & New saves the transaction but leaves the window open in case you want to make additional changes.

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