Need help with inventory adjustment....can anyone please explain how that works. I was told to adj.my inventory decrease by doing a journal entry to credit inventory & debit purchases....why am I increasing purchases? Thanks to anyone who can explain
most businesses find it difficult to take a physical inventory count every single day. So they use a modified estimate approach in their bookkeeping. Whenever a physical inventory count is done, there is often some hopefully small difference in what the books show and what is physically sitting on the shelves as inventory waiting to be sold. You can't show an item as an expense on your financial statements until it is sold. If there is less physical product sitting on the shelf, then it left - either through sales or theft or product spoilage. Since the product left, it can now be expensed and should be. The way you've been told is an accounting short cut, start the year out with a beggining inventory valuation, figure out what the end of year inventory valuation is and send the difference to purchases, as well as send anything to the purchases account that you bought during the year. This method assumes that every time you sell an item, you must buy it again to keep your inventory levels consistent. Another way to expense the difference between what your books say you have and what you actually have counted from time to time that seems to make more sense to my clients is to create a special expense account called difference in inventory counts - [which could end up being either higher or lower at the end of the year than your start value was for inventory depending on the circumstances], To make the QuickBooks programming put it in the correct section of the financial statements, it should always be sent to a type cost of goods sold account. Whenever you buy new product to store in inventory during the year, it goes to the purchases which is also a costs of goods sold type account. Since the end financial statements usually add up all the costs of goods sold accounts and list just one line item as a cost of goods sold expense, either way is acceptable. Hope this clears it up for you
to summarize, take the end of year physical inventory count and valuation. This number is what your account balance for inventory must show on day 1 of the next year. Since that number probably isn't what you had at the beginning of the year, you have to enter the difference into quickbooks as an adjustment.
One half of the transaction needs to be the inventory account itself that needs to be changed.
The holding pen account that you use to balance the adjustment is a cost of goods sold expense account and can be called purchases or change in inventory value.
