How Do I Choose the Adjustment Account When Adjusting Inventory Quanity or Value On Hand?

The adjustment account you choose depends on why you need to adjust inventory and how much detail you want in your GL.

Quantity adjustments can occur as a result of several common business situations, such as theft or discovery of damaged goods that have become unsaleable.  If you want a great deal of detail in your GL, you can create adjustment accounts for each type of adjustment.

Typically, the adjustment account you enter will be an expense account for negative adjustments; for positive adjustments, you may want to choose an income account.  Unless your general ledger has different accounts for different types of inventory variances, such as defects and shortages, we recommend assigning all inventory adjustments to the same GL account to provide for consistent reporting and to simplify tracking transactions.

In the screen shot below, we’ve selected GL account # 69000, Miscellaneous expenses.  However, this account selection won’t provide much detail to allow us to manage inventory adjustments at the financial statement level.  If your inventory adjustments are frequent enough or material enough, you may want to create a separate expense account for inventory adjustments.  For even more detail, that account could have multiple sub-accounts.  Adjustments would be recorded to these sub-accounts based on why inventory was adjusted.

When you enter a negative quantity adjustment, the inventory asset account (shown on the Edit Item window) for the item you are adjusting is credited (i. e., decreased), and the expense account that you entered as the adjustment account is debited (i. e., increased).  For positive adjustments, the debits and credits are reversed.  Both Profit & Loss and Balance Sheet accounts are affected by inventory adjustments.

In QuickBooks, while the Adjust Quantity/Value on Hand window is selected, you can press Ctrl + Y to display the Transaction Journal of the debits and credits entered.

Keep in mind that for each adjustment, you can choose only 1 adjustment account or enter 1 memo.  You can also enter a Customer:Job or Class.  Therefore, you’ll need to group your adjustments based on why you’re making the adjustment.

The debits and credits of value adjustments behave the same as quantity adjustments.  Typically, there’s a different reason for a value adjustment.  The most common is discovery of a value impairment.  In other words, the firm still has the same quantity of an item on hand, but because of changed market conditions or the passage of time, the value of those units has declined.  Switching from the default quantity adjustment to a value adjustment is accomplished by checking the Value Adjustment checkbox in the lower left of the Adjust Quantity/Value on Hand window.

Quantity adjustments to fix on hand levels that have become negative are a special circumstance of inventory adjustments.  Because QuickBooks uses the average cost method, the impact on accounts from allowing inventory levels to go negative can be far reaching.  To gain a better understanding of the impact, read our blog post on the subject.

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