17 Nov Consignment Inventory
Consignment Inventory Case Study
Consignment Inventory is merchandise owned by the business but is physically located at another location. The challenge in this type of situation is to keep clean records of what is where while developing a system that will also result in accurate financial statements. This situation comes into play in many different forms, assembly work that is subcontracted, distributors who re-sell product but do not ever actually own it, outside sales reps who carry “inventory” in their vehicle, etc. Consistently applied procedures are the key to tracking this type of activity.
Inventory tracking in QuickBooks can become complicated, even when a business simply buys and re-sells the same items. When additional requirements are necessary the process can become cumbersome very quickly. As with any major accounting issue individual situations may change the appropriate treatment of transactions, the following suggestions should be confirmed with the business accountant prior to implementation.
1. Create an “Inventory” type item for product that is sold. Depending on how the information is needed, sub-items often aid in managing the list, i.e. either there is a main item for the location with a sub-item for each specific product (typically with a designation letter at the beginning) or the product is the main item with the sub-items being the amount of inventory held at each location. With the former solution, reports will contain a subtotal by location which may eliminate the need to establish multiple inventory asset accounts on the chart of accounts. This process can be expedited by using the process of exporting the item list, opening it in Excel, copy the items, use find/replace to create the new items, and then import the list back into QuickBooks
2. If this process starts when there is not any inventory in the other locations, this step is not necessary. For businesses that do already have inventory in other locations, the most efficient way to move the inventory from one item to another when this process starts is through an inventory adjustment. Be sure to check the box that says value adjustment and confirm the extended value matches between the item the quantity is transferred from and the item the quantity is transferred to. This is a one time process to establish the correct inventory balances for each item.
3. For on-going activity, there are three alternatives depending on the personnel who will be involved (i.e. their QuickBooks knowledge, their accounting knowledge, and the level of detail they are permitted to see, etc) and the paperwork flow of the organization.
The first alternative is to enter an inventory adjustment as inventory is transferred from one location to another (like in step 2 above). To create a paper trail, consider using the Journal report filtered for inventory adjustment type transactions and adding the columns for the item and quantity.
The second alternative is to enter a zero balance invoice with the positive quantity for the item the product is being transferred from, and a negative for where the product is being transferred to. This is an easy way to create a paper trail to accompany the shipment, the zero balance invoices will not effect sales tax calculation, and the data entry person does not need to see or understand the accounting implications of the transfer. However, all of the cost transfer happens “behind the scenes” so it is possible the cost of the transfer may not balance between the two items. The transaction detail should be reviewed by knowledgeable accounting personnel regularly to ensure the general ledger detail is being accurately recorded.
The third alternative is to enter a zero balance bill with the positive quantity for the item the product is being transferred to and the negative for the item the product is being transferred from. This method permits control of the cost being transferred, however, the cost that appears automatically on the bill is the cost that was entered on the item itself, not the average cost that has been calculated as the item has been purchased and sold. To permit accurate costing of the item from one to the other, create an inventory valuation summary report and use the average cost column to value the inventory for the transfer. This method does require that the data entry personnel have access to the cost information and does understand how to implement the procedures.
4. As with any inventory system, inventory counts (both partial on a regular basis and a full count at least annually) are recommended, reports should be reviewed to confirm the procedures are being followed and no modifications are necessary. Inventory can be very useful in the management of the business, cash flow, etc. but it does require a commitment of all parties to check and double check that it is working properly.
List Limits Expanded
For most QuickBooks users, the list limit for the QuickBooks Pro and Premier products of 14,500 is sufficient. For some, however, that is not the case. We have been seeing increased list size for a variety of reasons. One of the most common is the increased number of customers as the result of web site sales. For version 6 and prior, the list limit was doubled for the Enterprise Solutions Product. New with version 7, the Enterprise Solutions limit has been removed.
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