This is the 3rd article in a series about using QuickBooks Point of Sale with QuickBooks accounting software. I was going to do it later in the series, but I get so many questions about it and find so many people struggling with it that I decided to post it now. My main purpose here is to explain how adjustments affect QuickBooks, but first a little background on inventory adjustments in general.
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:
- 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.
- 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.
- 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.