Can I Make An Inventory Adjustment Without Expensing It

Managing inventory is a crucial aspect of running a business, regardless of its size. This is because inventory, representing the stock a company holds, is a significant asset on its balance sheet. But what happens when you need to adjust inventory? More specifically, can you make an inventory adjustment without expensing it? This comprehensive guide will delve into this question and cover essential topics like whether inventory adjustments are an expense, how to make these adjustments, specific procedures for using QuickBooks, and correcting inventory errors in financial reports.

Is Inventory Adjustment an Expense?

An inventory adjustment typically involves modifying the recorded quantity of items in your inventory to match what you physically have on hand. This can happen due to various reasons, such as shrinkage, spoilage, or recording errors. But is this adjustment an expense?

1. Generally, Inventory Adjustment is Not Initially an Expense: When you adjust inventory upward or downward, the adjustment itself is not an expense. It's a correction to your asset account (Inventory) on the balance sheet.
2. Expense Incurred When Selling Inventory: An expense will occur if you need to write down inventory because it has become obsolete or when you actually sell the inventory. The cost of goods sold (COGS) is then recognized as an expense.

Understanding this distinction is key to managing your accounts accurately.

How Do You Do an Inventory Adjustment?

Performing inventory adjustments can vary depending on your business processes and the software you're using for inventory management. However, the fundamental steps generally include:

1. Conduct a Physical Inventory Count: Verify the actual number of units you have in stock.
2. Compare Physical Count to Recorded Numbers: Note any discrepancies between the physical count and current inventory records.
3. Adjust the Inventory Records: Update your records to align with the physical count. Depending on the software, you may have specific steps and interfaces, such as those found in Ordoro, a leading inventory management software used by hundreds of happy Shopify merchants.

How to Record an Adjusting Entry for Inventory

Recording an adjusting entry for inventory involves several important steps:

1. Identify the Reason for Adjustment: Determine why the discrepancy occurred—be it damage, miscount, loss, or theft.
2. Debits and Credits:

If inventory is overstated, debit the cost of goods sold (an expense account) and credit inventory (an asset account).

If inventory is understated, debit inventory and credit the cost of goods sold.

3. Document the Transaction: Write a clear description of why the adjustment was necessary.

How Do You Adjust Overstated Inventory?

When inventory is overstated, it means your recorded inventory is higher than what you physically have. Here's how to adjust it:

1. Verify the Overstatement: Double-check that inventory levels are indeed higher than actual amounts.
2. Adjust the Records:

Debit the COGS account.

Credit the Inventory account to reflect the decrease in inventory value.

3. Update Financial Statements: Ensure that this adjustment is documented and reflected in your financial statements to provide an accurate picture of your assets.

QuickBooks Inventory Adjustment Journal Entry

When using QuickBooks, adjusting inventory involves a few straightforward steps. Here’s how you can do it through a journal entry:

1. Navigate to the Inventory Module: Open QuickBooks and go to the Inventory menu.
2. Create Journal Entry:

From the Company menu, select "Make General Journal Entries".

Debit/credit the appropriate accounts based on whether you are increasing or decreasing inventory.

3. Save the Entry: Ensure you include a memo for future reference and save your update.

Inventory Adjustment Account

The inventory adjustment account acts as a temporary placeholder to help resolve discrepancies. It is used primarily during the inventory adjustment process to:

1. Record Differences: Capture any variances between recorded inventory levels and physical stock counts.
2. Aid Financial Reporting: Help in crafting accurate financial statements by providing insight into discrepancies.

Year-End Inventory Adjustment Journal Entry

End-of-year inventory accounting requires adjustments that reflect losses or gains in stock during the fiscal year:

1. Conduct Year-End Count: Ensure an accurate count and reconciliation of stock.
2. Journal Entry:

Use similar debit and credit entries as mentioned earlier.

Factor in matters like obsolescence and spoilage.

3. Update Financial Estimates: Make sure your adjusted inventory numbers are correctly reported in your year-end financial statements.

How to Adjust Inventory in QuickBooks Desktop

QuickBooks Desktop provides a user-friendly way to adjust inventory:

1. Open Inventory Adjustments: Go to the “Vendors” menu and select “Inventory Activities,” then “Adjust Quantity/Value on Hand.”
2. Select Account: Choose the appropriate adjustment account.
3. Adjust Values: Input new quantities for over or understocked items.
4. Save Changes: Review the adjustment and save your changes.

Ending Inventory Adjustment Journal Entry

The ending inventory adjustment is vital for generating accurate end-of-period financials:

1. Calculate Ending Inventory: Use your physical stock count and records to ascertain the ending value.
2. Create Journal Entry:

Credit COGS if inventory is understated.

Debit COGS if inventory is overstated.

3. Finalize the Adjustment: Complete and verify your journal entry to ensure all financials reflect this adjustment.

How to Adjust Inventory in QuickBooks Online

In QuickBooks Online, adjusting inventory is similar to the desktop version but with a few variations:

1. Access Products and Services List: From the dashboard, navigate to "Sales" and then "Products and Services."
2. Find and Adjust Items: Locate the product, click "Edit," and adjust the quantity.
3. Enter Memo: Always include a memo to clarify the nature of the adjustment.

How to Make Inventory Adjustment

Making an inventory adjustment involves taking several careful steps to ensure accuracy:

1. Assess the Need for Adjustment: Review your inventory, noting any shrinkage or discrepancies.
2. Prepare and Record Adjustment: Use your accounting software to record these using appropriate journal entries.
3. Verify and Document: Always verify entries and keep detailed records for auditing and reporting purposes.

How Should Inventory Errors Be Fixed in Financial Reports?

Inaccuracies in inventory must be corrected to prevent misleading financial reports:

1. Identify the Error Type: Understand if the error relates to inventory count, valuation, or accounting entries.
2. Restate Affected Accounts: Correct the books by adjusting the misstated accounts.
3. Disclose Material Errors: Whenever errors are significant, include a disclosure note explaining the impact and resolution.

Correctly handling inventory will ensure financial reports accurately reflect the company’s financial position. Effective inventory management software like Ordoro can simplify these processes, offering seamless solutions and reliable support to several hundreds of Shopify merchants who choose Ordoro for their business needs.

By following deep-rooted accounting principles and utilizing effective software tools, you can maintain accurate inventory records without necessarily expensing every adjustment directly. This simple guide should help you navigate inventory adjustments swiftly and accurately.