What is an inventory adjustment?

In POS, an inventory adjustment is a transaction outside of the normal receiving and selling process that changes the quantity or value of your inventory. There are 3 ways to explicitly create an inventory adjustment:

1. Enter a Quantity Adjustment (Inventory menu -> New Quantity Adjustment) – Do this when you need to remove items from inventory for some reason other than sales. For example, donations, giving products away for marketing purposes, damage, or theft. Be sure to enter a meaningful comment in the Comments section at the bottom. You must select a Reason code from the drop-down list at the top, but these codes are pretty useless. You can’t change them, and there aren’t many meaningful reasons in the list.
2. Enter a Cost Adjustment (Inventory menu -> New Cost Adjustment) – Cost adjustments are rare, and are generally only used if the value of your existing inventory has changed permanently. For example, you might sell collectibles, and there was some significant change in your market that affected the value of your inventory. Most retailers will never use cost adjustments.
3. Taking a physical inventory (Inventory menu -> Start Physical Inventory) – This is really just a special type of quantity adjustment.

I always recommend printing quantity and cost adjustments and giving them to the bookkeeper. These will help you complete the transaction later on the QuickBooks side as described below. Yes, I know everybody wants to save trees, but this could save a lot of time in the long run.

The hidden adjustment that will drive your bookkeeper crazy

In addition to the 3 types of explicit adjustments listed above, adjustments are also created implicitly if you change an inventory item’s Average Unit Cost or On-Hand Quantity. You should never change these values under normal circumstances, and your POS security should be set up to prevent users from changing them. Average Unit Cost is maintained by the receiving process, and On-Hand Quantity is maintained by the selling process. Aside from initial item setup when you set up POS in an existing business, there’s no good reason to change these values. I’ve seen several retailers mistakenly use this as a way to receive inventory. No – Bad retailer! Bad, bad, bad!!!

Aside from usually being the wrong way to accomplish whatever it is you’re trying to do, changing the Average Unit Cost or On-Hand Quantity creates an inventory adjustment behind the scenes (which you can view with the Quantity Adjustment History or Cost Adjustment History in the Inventory menu), but it doesn’t leave any trail as to why the adjustment happened.

How adjustments appear in QuickBooks

As part of the QuickBooks financial exchange in the POS End of Day process, inventory adjustments are sent to a special QuickBooks expense account. Usually this account is called “POS Inventory Adjustments”, but in earlier versions it was named “Document Offset”. It could also have been renamed to something else by whoever set up your system.

This adjustment account is a catch-all for all POS inventory adjustments, and is not useful for financial reporting. You should zero it out before publishing financial reports or filing a tax return. This is why it’s important to print your adjustment documents from POS and enter meaningful comments on the adjustment. You need to know the reason for the adjustment so you can use a journal entry to reclassify it to the correct account in QuickBooks.

For example, you may have created an inventory adjustment to reflect the fact that you donated some products to charity. In this case, you would probably create a journal entry to credit the POS Inventory Adjustments account and debit a “Charitable Contributions” expense account. Similarly, you might transfer the amount to a marketing expense account if you gave away products for promotional reasons, or to a Cost of Goods Sold account if inventory was reduced due to spoilage or damage.

I’m the proud owner of an HP LaserJet P1006, which is a great laser printer for the price (about $100). Lately I’ve noticed that the print is getting a little light, so I wanted to check the toner level. After going through all the menus and settings pages, I couldn’t find any indication of the toner level. So as a last resort I decided to read the manual.

It turns out that to check the toner level, you have to print a report. On paper. Using toner. It’s on a dialog buried deep within the printer settings:

OK, if they already know the toner level, why can’t they display it on this dialog, instead of forcing you to print it? To add insult to injury, you don’t get to choose which printer to print the report on, thus using up even more of the toner that you’re trying to check! (Technical note: I suspect this information is only available inside the printer, and is not shared with the computer to which it’s attached.)

The printed report is about 75% white space (after all, how much space does it take to show the toner level?). At least they include recycling instructions…

That’s a good question. I just happen to be re-reading Alan Weiss’s “Value-Based Fees“, and Alan has this to say in a section about the ethical nature of Capitalism (pg. 2):

Russia has failed (at least thus far) at capitalism, not because of an underlying or lingering communist belief system and not because of a lack of resources or unwilling populace. It has failed because the ethical basis required for the system to work is not firmly in place. There is still too much of an attitude of “Can I get away with this?” and “How can I take advantage of the other party?” We can also see this situationally within some professions, within certain industries, and within some organizations.

This comment about Russia could easily apply to some former Iron Curtain regions such as Slovakia. Some readers will point out that capitalism in the United States hasn’t been exactly ethical. Refer to the last sentence in the quote above. The only reason these so-called American “capitalists” get away with losing other people’s money, and getting more money from the taxpayer, is because of their willing accomplices in the Democratic and Republican parties. That’s not capitalism, because the people footing the bill (you and I) aren’t doing so freely and receiving fair value in exchange for our money.

Main Street capitalism in the United States works, and it works best when a business delivers value to its customers, makes sure customers perceive that value, and asks for fair payment in return. Trying to make that work in an environment where everybody is out to get you just might be a lost cause.

I’m a member of the QuickBooks consulting team at CFO Selections LLC in Bellevue, WA. I specialize in QuickBooks Point of Sale and Enterprise Solutions, and am also certified in Field Service Management and QuickBase. I’ve helped several clients integrate their eCommerce web sites with their QuickBooks or QuickBooks Point of Sale software, using PDG Commerce and T-HUB from Atandra.

Please feel free to contact me regarding your QuickBooks needs at mike@cfoselections.com or 425-941-7648.