 QuickBooks Online Inventory Quantity Adjustment Get ready to start moving on up with QuickBooks Online. We're going to be using the free QuickBooks Online Test Drive, searching in our online search engine for QuickBooks Online Test Drive, then picking the option that has Intuit.com in the URL, Intuit being the owner of QuickBooks, selecting then the United States version and verifying that we're not a robot. Zooming in by holding down control up on the scroll wheel currently at 1-5% on the zoom in, selecting the cog drop down just to note that we're in the accountant view as opposed to the business view. We'll try to toggle back and forth between the two so you can see the two views. We're going to be duplicating some tabs by going to the tab up top, right clicking on that tab and duplicating it and then right clicking on the duplicated tab to duplicate it again. Then back to the tab to the middle. We're going to go down to the reports on the left and choose the balance sheet report. As that's thinking, we'll tab to the right reports on the left. This time choosing the profit and loss or income statement, the P and the L. Closing the hamburger or hamburger scrolling up and then we'll range change starting with 0-1-0-1-2-2 to 12-31-2-2. That's January to December of 2022. Run it to refresh it. Tab to the left. Close the hamburger and scroll up top. Change the range. The range. They are a change in 0-1-0-1-2-2 to 12-31-2-2 and run it. If you want it to be fresh and then we're going to go back to the left. That's the setup process that we do every time hitting the plus button. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. We've been looking at the major forms that are broken out by cycle and then we've been looking at these forms on the right which are a little outside of the normal cycle. But there's still going to be normal things that we do on a regular basis and therefore they're in this area which is housing the stuff that we often normally do. Now this time we're going to be looking at the inventory quantity adjustment. The inventory quantity adjustment would only be used if you're tracking the inventory on a perpetual inventory system within QuickBooks. Let's take a quick jump on over to our flow chart to think about what that means. This is going to be not the online flow chart but we're just getting an idea of the flow so we can see how inventory fits into it. So we have the vendor cycle, we have the customer cycle. The inventory is going to be bridging or going between or be involved in both the vendor cycle and the customer cycle. Because on the vendor cycle we expect at the end of the cycle we're going to be paying for goods and services, money going out. And then on the customer cycle we're going to be expecting at the end of the cycle for our checking account to go up for goods and services we provide to customers. When we have inventory, if we're just purchasing and selling inventory, purchasing, marking it up and then selling inventory, then we're going to have to pay for the inventory on the vendor side of things. And of course we're going to be selling the inventory down here on the customer's side of things. So tracking the inventory becomes an issue because not only do we have to track the dollar amount of the inventory but in some way shape or form we typically have to track the units of the inventory. Now there's a couple ways you could do that because for example the easiest way to deal with inventory, and this would only be applicable if you have like a just in time kind of inventory system, would be that when you buy the inventory maybe you just write a check and write it off at that point staying on a cash based system, writing it off to cost of goods sold, which would only be applicable if you're going to turn around and sell the inventory possibly because you bought it for a custom job or something very soon. And that way you don't have to track the inventory as an asset at all. So that would be not really deviating from a cash based system. But most of the time the inventory forces us to deviate from a cash based system because now we have a significant amount of inventory we need to track as an asset as opposed to expensing it at the point of purchasing. So that means that when we purchase it then we're usually going to be putting it on the books as an asset and that usually is going to be done with either a bill form or a check form, a purchase order possibly before the bill form and then a bill form or a check form. And then we're going to when we sell the inventory that's when we've consumed it. We've consumed the inventory and then we're going to sell it. And so that means that we're going to decrease the inventory and record the cost of goods sold related to it as well as the sales. So sales and cost to goods sold income and expense related to the selling of the inventory, the difference between the sales price, the cost being our gross profit. That's usually done with an invoice or sales receipt. However, you can imagine a system where you have a periodic inventory system where you're not going to track the inventory on unit basis within the system, but rather do that outside like in an Excel worksheet, for example. And that can make it a little bit easier within QuickBooks because you don't have to turn on the tracking kind of system and deal with that whole process. In that case, you would simply be when you buy the inventory, say with a check, for example, you would be increasing the inventory account, but not have a sub ledger for the units of inventory. Like if you're buying guitars, you wouldn't be tracking the fact that you bought 10 guitars or whatever. You just got the purchase price of it. You would track the fact that you bought 10 guitars on a sub ledger account. And then as you sell the guitars, you would just be selling them with an invoice or sales receipt or even a deposit form, because you're not going to have to track the inventory with it in terms of the units of inventory. So you're not actually going to decrease the inventory account when you record these, but rather do a periodic physical count at the end of the day, week or month, and then do your cost of goods sold formula, which would be beginning inventory plus purchases minus ending inventory, to figure out how much you sold to figure out the cost of goods sold and do a periodic adjustment. That's another way that you can deal with inventory. And then the third way, which would be the full service way within the system, is that we're going to track inventory as we purchase it. So now when we enter the bill, we have a perpetual inventory system. QuickBooks is going to be entering the fact that the inventory account goes up as well as the sub ledger in terms of units go up. So if I bought 10 guitars, it's going to give us the price of the guitars and the units. And then when we sell the items with an invoice or a sales receipt, we can't use a deposit because it doesn't give the functionality of tracking the inventory. We got to use these two forms. It will then decrease the inventory and record the cost to get sold as well as the sales price automatically. Now, if we do that, then we're on a perpetual inventory system. And you might think, well, inventory is going to take care of itself. No problems at that point because I'm tracking the inventory in real time as we enter it into the system. But clearly it's not going to be perfect because things happen. We could lose the inventory. We could have spoilage. We could something could just go wrong in terms of tracking the inventory. So we still have to do a physical count. And then we're going to have to adjust our inventory to the physical count. We got to adjust our system is not going to be right when we come right. We have to compare the count to what is actually in our system. Our eyeballs are the things that we're going to trust the count. And then we're going to have to fix our inventory to align with the count. That's what we're talking about now when we get to this adjustment here, which is the inventory quantity adjustment. So to see that, let's just add some inventory items. And I'll do that with a and then we'll make some adjustments to them. So let's say that we go down here to the sales area. And I'm going to go into the products and services and let's just make up some items that we're going to track inventory with. So I'm going to say a new item. I'm just going to call it an inventory item and call it inventory one. I'm going to copy that and then I'm going to put that down here. Now note, I could add a quantity on hand here, which would actually create a journal entry. But maybe I'll go in and make an adjustment to add the quantities on hand because and I think that would be a better way to do it. But we'll talk more about that in the second half of the course, how to put the quantity on hand. But I'm going to start at zero and then we'll make an adjustment for it. I'm going to say this is this is here as of let's say the beginning of let's go back a bit so I can add the and then we'll put it right there. Reorder point, I'm just going to say zero and the inventory account. That's the asset account. I'm going to call the description inventory one the price. This is going to be the sales price. Let's sell them for 200. Let's say tax is applicable on it. Good. We'll keep that purchase amount. Let's say we purchased them for $75. Cost of goods sold is what we sell them or the account when we sell them the expense account. Let's save it and close it. And so now we're going to have if I scroll down, there's the inventory one item. Let's now go. Let's now let's edit that. Let's actually edit that and let's make a group a category and add a new category and call it call it add category. Let's call it test inventory category so we can see these in one area and just to show you how to use that category thing. So now if I go up to the categories, we should have the test down here. That puts it at the bottom, which isn't the most convenient. I should have called it a which is my normal custom. Anyways, let's add a couple more before I do anything to it. I'm going to say new and then inventory again. Let's call this inventory to and I'm just going to copy that. I'm going to put that in my test my test inventory category. Nothing on hand to start with. We're going to say let's bring this back a bit and then reorder point is zero description sales price. Let's make this 300 just to change it up. Let's say that description. Let's say we purchase it for 120 cost a good sold looks good. So there's that one and let's make one more. I'm going to make one more and say new and then inventory. Let's make this inventory. Yes, three. I know it's not very original. Can't you be more creative? We're trying to try to keep people's attention here. It's creative. That's creative. That's 450 and then we'll say this is let's say this is 200 on the sales price. So there's our items. I need the quantity on hand the reorder point. Let's go here and zero and boom. So there's just a couple items now. Now normally when you when you start out like when you have the inventory you're going to you're going to purchase the inventory. So when I purchase it you could you could start with a purchase order and then enter a bill. I'm just or you could go directly to the bill or to the check to purchase inventory. That would be the vendor side of things. So if I then let's go to just an expense form for it and I'm going to say it's a purchase. Let's just call it we're purchasing from a that's our vendor now. I'm going to save it and then checking account. And so then we're going to be purchasing inventory inventory item. Hold on a second. We're going to be purchasing not category but items and this is going to be inventory item one. Let's say we purchased ten of those and then inventory inventory two. Let's say we purchased seven of those and then inventory three. Let's say we purchase let's say we purchase two of let's say three of those. So now this is going to be a purchase. It's an expense form decreasing the checking account. The other side going to inventory driven by these items that we set up. That's the account that's going to be affected because of those items but also tracking the units of inventory in the sub ledger. So let's save and close that and check that out. So I save it and close it. I can see that here in my products tab. So if I go down I've got my units on hand here. I can also go to my balance sheet and I can run it and I can see I have my transactions in my inventory asset account. So if I go into the inventory asset and scroll down we've got these transactions going back up. And then I'm going to go to the tab to the right right click on it and duplicate this tab. Let's duplicate the tab. And then I'm going to go to the reports on the left just to take a look at the sub ledger report which is going to be I'm just going to type in inventory inventory summary report. And so as of let's say 1231 to two and run it to refresh it. So now we've got these amounts on hand for our inventory and notice. I think they so so these and that two four one one twenty five for the total ties out over here to the two four one one twenty five but now we have the units of inventory as well. Now of course what would happen over time is we could sell the inventory. So when we sell the inventory on a perpetual inventory system we could do that say with an invoice and let's say we sold BBB the customer. And I'm just going to add that and we're going to sell let's just say inventory one and let's say that we sell two of those. So four hundred. So this is going to be recording the transaction of accounts receivable going up by the four thirty two. The other side going to sales four hundred sales tax going up of a payable thirty two inventory going down and cost of goods sold being affected by the amount driven by this item. Not the two hundred or the four hundred the amount that the inventory was on the books for driven by the item. But the point we want to be focusing in on here is that it's also going to be decreasing the units of inventory automatically on a perpetual inventory system basis. If I didn't if I wasn't tracking the inventory then it wouldn't be tracking the decrease in the inventory. I would have to do a journal entry for that periodically based on a physical count outside of QuickBooks and like an Excel worksheet. But we're doing this periodically so it's going to do it for us. So if I save this save and close then I can see the transaction over here in inventory. If I run the report account accounts receivable. Let's look at inventory has now gone down by the seven fifty which is an amount not on the invoice but tracks. Hold on a sec. This is the expense form. The inventory is going down by one fifty one fifty which is an amount that's not on the invoice but tracked by the invoice. From the item so closing that back out scrolling up. So so that would mean that the and the inventory item over here on the sub ledger. If I run this report again has now gone gone and been adjusted to to the eleven now. So that or did we sell inventory item three on it. Anyways it adjusted the inventory item. So now we're at one six six five and that should tie out to the balance sheet at the hold on a second. The inventory here is at two two six one twenty five and two two six one twenty five. So it's updating real time is the point. But we'd still need to do a physical count because that what's on the books and what's on my sub ledger might not match the physical count. We have to we have to look at reality because there could be theft or could be shrinkage or something over here. And I think I didn't set up the inventory three exactly properly but I'm not going to go back to this just get the general idea here. So I'm going to then so then we got to do a physical count right. And if the physical count doesn't line up to what's what's in here then we have to make an adjustment. So if I did a physical count for inventory one and I usually the physical counts going to be less than. So I'm going to say OK I only had nine instead of eleven. Well now I'm going to have to adjust what's in the books down to what the physical count is. So that's where the adjustment would be. So you might then go into your your plus button and we could go to an inventory quantity adjustment. And so now we've got the adjustment date the inventory adjustment account. So they've set one up here to shrinkage which which is typically the case. It's the kind of cost of goods sold account. You might write it off directly to cost of goods sold because usually it's hopefully going to be kind of an in material amount. So you might not break it out in its own account. You might just record it to cost of goods sold which is the income statement account related to inventory. And the reason you want an income statement account is because then then it'll roll over into the retained earnings and whatnot. But if it's significant you might call it you know break it out in its own account like shrinkage or something like that. But note they still put it in the category of cost of goods sold. And then we can select the product here which we can say is inventory one and then inventory one is the one. And a description pulls up and so the new quantity and this is the quantity on hand. We can compare that to the new quantity which we're going to say is nine in this case. So we've lost those two quantity of units. What's this going to do this then this is a form it's going to create a transaction. It's going to be lowering the inventory account and the other side is going to be driven to this one which we set up which is the inventory shrinkage. A cost of goods sold type account on the income statement and the sub ledger is going to be adjusted from 11 units down to nine units. So let's save and close it and check it out so I can go then to the balance sheet and run it. And then inventory here has been adjusted if I go it's undeposited funds hold on hold on a second. That's not where I wanted to go inventory. So let's go into inventory and scroll down. So then now we've got these adjustments that have been made inventory adjustment and inventory quantity adjustment. So then we're going to go back up. Let's go back to our report and then go to the income statement to look at the other side run it. There is a transaction being recorded. We put it into cost to get sold category but we made another account. They had another account. We didn't really make it now of the inventory shrinkage. So there's that. So the inventory shrinkage recorded scrolling up. It was they got cold water or something. There was a shrink there shrinkage because it was cold. So we're going to say run run this one again. And so we're going to scroll down. And so now we've got another inventory report down to nine. And the total then should tie out to one one one twenty five should still tie out to what's on the balance sheet of two one one one twenty five. So that's how the adjustment would be. You still need to do a perpetual an account when using a physical count when using a perpetual inventory system so that you can record typically shrinkage that happens over time due to theft or whatever and be able to track your inventory more closely. Now notice you might go into this area first which is the products under the sales tab and then go down to to the items and do your comparisons and say OK this particular item is whatever an eight or something. And then you can you can hit the drop down and say that you want to make your quantity adjustment this way and then scroll into that. And now you can go in here directly and once again the new quantities right there if it went down to eight you can change it to eight which would make an adjustment change of one. So that's basically the adjustment form so inventory can be depending on what kind of the company you have more complex and tracking it within the system can be somewhat complex. You still need to do those adjustments to get the real world to line up to the your perpetual inventory system. OK let's hit the drop down up top on the cog and just look at some places we have gone under the business view just so we can look at the two views. And we're going to say that if I go back to the home page the get things done page we got the plus button up top same stuff with your inventory adjustment there. We've got the get paid and pay area which is the main place we've been working in. We've got the products and services and these are the products and services that we've been working down here. You've got your customers up top and the get paid area as well that we've looked at briefly and we've looked at the reports in the business overview into the reports. So same stuff different you know look and feel on the business view versus the accounting view.