23 Nov Ask the Expert – Inventory Unit of Measure
Ask the Expert – Inventory Unit of Measure
Q – I purchase a product A and sell it in smaller quantities as a different product B. My inventory of the first product is not reduced when selling product B but the inventory of the product B is negative. Of course the balance sheet shows negative inventory. How can I correct this problem so that the system reflects correct COGS and Inventory?
(Submitted by Mike)
A – There are two things that come to mind immediately: one it to fix the current situation, the other is to eliminate the problem in the future.
To fix the current situation – within QuickBooks there is a feature to adjust the quantity and value on hand which will permit correcting the quantity and value to match what you have physically on hand. To use this feature, from the top menu bar choose Vendors > Inventory Activities > Adjust Qty/Value on Hand.
To eliminate the problem in the future – from the tone of your question, I am assuming you want to use QuickBooks to track inventory. The perpetual inventory system has the advantage of an Inventory asset account balance that is always up to date, and matching of the cost of goods sold to the invoice. In contrast, using non-inventory type parts rather than inventory type parts will eliminate the problem of purchasing one item and selling another. The trade off is that the cost of goods sold amount is recorded at the time the goods are purchased and the income is recorded at the time the goods are sold so the Inventory asset account must be manually adjusted to have accurate financial statements.
QuickBooks uses average cost, so purchasing the inventory prior to selling it, as well as having a consistent unit of measure is critical. In you specific situation, my suggestion would be that you use only one item and a consistent unit of measure. For example, if you sell bottles that you purchase 12 bottles to the case and sell individually, you would need to determine, do you purchase 12 bottles or do you sell 1/12 of a case. My experience has been that it is usually easier to use the smallest unit of measure, in this case the bottle when you receive the inventory, enter the bill, enter the check, etc.
Warning – Keep in mind that if you are using QuickBooks to generate a purchase order, you may need to discuss the situation with your supplier so you do not receive 12 cases when you ordered 12 bottles, or make the determination that the per case item is noted as only for the PO in the item name and as the shipments are received, you manually close the purchase order.
Alternative – depending on your specific industry and needs, it may be worth investigating one of the many inventory add-on products that seamlessly integrate with QuickBooks.