Inventory Adjustments


J

Jimmy

I purchase certain products in bulk, say 50 cubic yards at a time and then
sell the product to customers by the yard. What I buy in and what I sell
rarely matches up. When I have sold all 50 yards of that product I have
usually sold it as 55 or 60 yards. This leaves a negative inventory balance
in QB. I assume that I can just make an inventory adjustment to 0 but I'm
not sure what account I should charge this to. Should it simply be shown in
an income account - i.e. Income: Bulk Material ??
 
Ad

Advertisements

A

Allan Martin

Jimmy said:
I purchase certain products in bulk, say 50 cubic yards at a time and then
sell the product to customers by the yard. What I buy in and what I sell
rarely matches up. When I have sold all 50 yards of that product I have
usually sold it as 55 or 60 yards. This leaves a negative inventory
balance
in QB. I assume that I can just make an inventory adjustment to 0 but I'm
not sure what account I should charge this to. Should it simply be shown
in
an income account - i.e. Income: Bulk Material ??

No, in your case the adjustment should go to the cost of goods sold
account(s).
 
P

Paul Danaher

It seems to me we've just had exactly this query in the thread "Question
about "Customer/Vendor Inventory Items". Tara's answer there was.

Okay... so if I understand correctly, I should stick with the
individual "bucket-size" item, and if I buy a trailer load, I should
just guestimate at 100 buckets. I tried to change the item from
"inventory" to "non-inventory," but it wouldn't let me.

Thanks so much for your help!
No, don't try to guesstimate buckets. Setup one Non-Inventory Item with the
checkbox checked. On the left side of the bottom of the screen enter a cost
per truckload of $100 or whatever the bulk load costs you (if its standard,
otherwise leave it zero) and assign the cost account to Cost of Goods Sold.
On the right side assign the cost per bucket, whether you charge tax, and
assign an income account.

It'll look like you're taking a huge loss just going by those numbers if
buying it costs $100 and selling it brings in $10 per bucket. However, we
know that's not the case because you'll sell many buckets from just one
purchase. That's why you use a Non-inventory item. It will allow you to
enter a bill, or write a check, for 1 Mulch at $100. It'll allow you to
enter an invoice or sales receipt selling 20 Mulch (buckets) at $10ea.

In other words you can buy one but sell many using this item type. It won't
track in inventory because its not an inventory item but since you don't get
an exact number of buckets per truckload each time you realistically cannot
tell QB how many you have on hand.
 
A

Allan Martin

Paul Danaher said:
It seems to me we've just had exactly this query in the thread "Question
about "Customer/Vendor Inventory Items". Tara's answer there was.
True but her believe "try not to guesstimate" is not shared by all. There
are many businesses where and educated estimate as to initial quantity with
periodic corrections is preferable.
 
P

Paul Danaher

Allan said:
True but her believe "try not to guesstimate" is not shared by all.
There are many businesses where and educated estimate as to initial
quantity with periodic corrections is preferable.
My limited experience is showing - I'd regard 10-20% uncertainty as too
great for this approach, but I always require accounts to reconcile 100%, so
....
 
?

!-!

1. Despite some belief to the contrary, there are many accounting
transactions that involve estimates and opinions, and therefore that
do not "reconcile 100%". A common example is depreciation. Of course
some people believe the opposite, that almost all accounting is a
matter of arbitrary choices and opinions. As in many other fields of
human endeavour, probably the truth is somewhere between the extremes.

2. Many of the opinions expressed and much of the advice given here
come from non-professionals, and certainly the experience and other
credentials of the opinionated vary widely. Many of the questions
asked do not provide sufficient information for a well-founded answer
from anyone, professional or otherwise - but still the opinions and
advice flow.

3. When in doubt, consult a competent experienced professional. A
good place to start is one's own accountant, though certainly all
accountants are not necessarily professional, competent or
experienced - but your own accountant should AT LEAST have some
familiarity with your business and therefore be able to offer advice
that is appropriate and practical rather than generic and hypothetical
or theoretical
..
 
Ad

Advertisements

T

Tee

Paul Danaher said:
My limited experience is showing - I'd regard 10-20% uncertainty as too
great for this approach, but I always require accounts to reconcile 100%,
so
In the case of mulch or even fill dirt you'd have to manually unload the
purchased bulk by the measure of qty you use for resale or in the course of
your work in order to obtain an exact number & have a 100% reconciliation in
any given timeframe. Purchased truckload 1 may be the equivalent of 50.75
buckets, truckload 2 may be 49.50 buckets, truckload three may be 52.10
buckets. When you buy such loose, mass, items like the ones I named in one
quantity but resell in a different quantity then you're setting yourself up
for inventory discrepancies unless you initially count out the bulk by the
measure of qty you resell.

Every accountant I know & work with is perfectly fine with a periodic
adjustment for small to medium sized businesses who are not having any IRS
troubles and/or whose records aren't scrutinized by the public or other
agencies. If you know you sold 250 buckets of product this quarter, have
what looks like 5 buckets left and you purchased 5 truckloads at $100ea then
simple division implies that you averaged 51 buckets per purchase for an
average cost of $1.96 per bucket.

Its not a perfect method but then the above isn't a perfect product when it
comes to qty on hand. I wouldn't expect the same method to be proper for
most businesses who buy & sell items that have an actual qty count that can
be measured per item.
 
G

Golden California Girls

Paul said:
My limited experience is showing - I'd regard 10-20% uncertainty as too
great for this approach, but I always require accounts to reconcile 100%, so
...
All accounting involves estimates. Consider a reserve account for bad debt.
You have to estimate how much bad debt you will have for the credit sales you
do. It will never match! If it did a serious examination of the books would
be in order because I would suspect they were cooked. You guess how much debt
will go bad from your historical record. It is called an estimate.

Bulk materials like the OP and the OP in the other thread asked about are
subject to shrinkage. The amount sitting in the back forty is subject to gain
or loss depending on the humidity and temperature. Some of it is lost going
home on boots. The material at the bottom of the pile may be compacted more
than the material at the top of the pile. Never mind that when you sell a
bucket you might actually measure out 1.1 buckets or 0.9 buckets. Then there
is the other kind of shrinkage. Then employee who takes a couple of shovels
full home. Inventory on things like this is always a guess. You use you
historical adjustments to come up with an estimate. You take inventory to come
up with your shrinkage.
 
P

Paul Danaher

Golden said:
All accounting involves estimates. Consider a reserve account for
bad debt. You have to estimate how much bad debt you will have for
the credit sales you do. It will never match! If it did a serious
examination of the books would be in order because I would suspect
they were cooked. You guess how much debt will go bad from your
historical record. It is called an estimate.
All right, let's distinguish between accounts which are NOT subject to
estimation and those which are! A provision, for bad debt or anything else,
is by its nature probabilistic, and is part of the forward-looking process
of accruals accounting. A bank account or credit card account should
reconcile 100%. Ex post, so should "accounts receivable" - at the end of the
day, either an invoice is paid, or it's adjusted or written off. Provisions
are temporary.

What I said is that I'm not familiar (and comfortable) with a business in
which there's a 10-20% margin of uncertainty in the relationship between
volume of materials purchased for resale and volume sold (with no
significant processing).
 
P

Paul Danaher

First, you're quoting me out of context. I quoted your suggestion in the
previous thread in answer to the present question, and I was defending your
approach to Allan Martin, who seemed to be taking a more rigorous approach.
Second, you're talking about an average variance of 2%. JessiRight77's
original question was talking about tractor loads containing 80-110 buckets,
the current question refers to 55-60 yards sold from an initial purchase of
50 (cubic) yards. I find this range of variation surprising, which I'm
attributing to my lack of experience.
 
T

Tee

Paul Danaher said:
First, you're quoting me out of context. I quoted your suggestion in the
previous thread in answer to the present question, and I was defending
your approach to Allan Martin, who seemed to be taking a more rigorous
approach. Second, you're talking about an average variance of 2%.
JessiRight77's original question was talking about tractor loads
containing 80-110 buckets, the current question refers to 55-60 yards sold
from an initial purchase of 50 (cubic) yards. I find this range of
variation surprising, which I'm attributing to my lack of experience.
I realize you were defending my & had quoted the method I suggested in
another thread. I was responding to the 100% reconciliation of accounts you
said you require. I merely pointed out that such a thing is not always
possible depending on the goods you deal with.
 
Ad

Advertisements

J

Jimmy

Allan Martin said:
No, in your case the adjustment should go to the cost of goods sold
account(s).
Why cost of goods sold?? If I paid for 30 yards but sold it as 35 yards,
wouldn't the extra 5 yards simply be extra income with no cost associated -
like getting an extra 5 yards free from the supplier??
 
P

Paul Danaher

Tee said:
I realize you were defending my & had quoted the method I suggested in
another thread. I was responding to the 100% reconciliation of
accounts you said you require. I merely pointed out that such a
thing is not always possible depending on the goods you deal with.
Getting back to substantive matters, are there really businesses which have
a 20% variance in the ratio of volume purchased to volume sold which the IRS
signs off on? If so, then I think I should move into this field immediately
....
 
H

HeyBub

Jimmy said:
I purchase certain products in bulk, say 50 cubic yards at a time and
then sell the product to customers by the yard. What I buy in and
what I sell rarely matches up. When I have sold all 50 yards of that
product I have usually sold it as 55 or 60 yards. This leaves a
negative inventory balance in QB. I assume that I can just make an
inventory adjustment to 0 but I'm not sure what account I should
charge this to. Should it simply be shown in an income account - i.e.
Income: Bulk Material ??
Rethink the issue.

Consider a contractor. Customer calls him and describes problem. Contractor
goes to wholesaler and picks up part. Then contractor goes to customer's
location and installs part. Gets paid.

Did the contractor actually HAVE any inventory? Well, yeah, for about an
hour, but is that hour of ownership worth tracking? I say no. If you agree,
how long does it take to sell a truckload of product? A week? A month?
Whatever the interval, is it worth your time and trouble to massage the
bits?

Consider Denny's. They get 60 dozen eggs delivered each day. Can you imagine
their computer system taking the trucker's ticket and diminishing their egg
on-hand count by two (over easy)? Or entering inventory adjustments when an
egg lands on the floor?

I, like the contractor, buy the stuff as cash out and credit COGS, maintaing
no inventory at all. Then I'd sell individual buckets. On average, you'd be
off half-a-load in the course of a year. Even so, at end of year, you could
look out the window and estimate the pile to reduce that error.

Bottom line - if the product gets sold in short order, and absent some
compelling reason to the contrary, I don't think it's worth the effort to
track the product as inventory.
 
G

Golden California Girls

Jimmy said:
Why cost of goods sold?? If I paid for 30 yards but sold it as 35 yards,
wouldn't the extra 5 yards simply be extra income with no cost associated -
like getting an extra 5 yards free from the supplier??
The income is already recorded. It is recorded on your invoices. What is
wrong is the cost. While one way to look it is you ordered 50 and got 55,
another way to look it is you got 55 but he charged you for only 50. It is the
second way that you need to look at it. You adjust a COGS account cost when
you make the inventory adjustment. What is happening is your average cost per
unit was recorded higher than it actually was. You are adjusting it to what it
should be, or bringing the cost back into alignment.

If your supplier is consistently giving you 55 yards and you order 50, then
another way to handle it is cut the PO for 50, do an item receipt for 55 and
when entering the bill for items received, just change the amount to what he
charges you for the 50 you ordered. That will set the cost of goods for this
item much closer to reality and the inventory quantity closer. This is the way
you would do it for unit quantity items.
 
G

Golden California Girls

Paul said:
All right, let's distinguish between accounts which are NOT subject to
estimation and those which are! A provision, for bad debt or anything else,
is by its nature probabilistic, and is part of the forward-looking process
of accruals accounting. A bank account or credit card account should
reconcile 100%. Ex post, so should "accounts receivable" - at the end of the
day, either an invoice is paid, or it's adjusted or written off. Provisions
are temporary.

What I said is that I'm not familiar (and comfortable) with a business in
which there's a 10-20% margin of uncertainty in the relationship between
volume of materials purchased for resale and volume sold (with no
significant processing).
Let's start with something on you kitchen table. Grab a teaspoon. Shove it in
the sugar. Pull it out. Call this one bucket. Was it a level teaspoon full
or a heaping teaspoon full? Now try it with a different shape of spoon, say
one that is deep but small in diameter. Level they should be the same, but
heaping there could be a 20% variance. Finally consider the supplier may be
selling heaping teaspoons and our poster is selling level teaspoons.

Now realize that teaspoon represents a skip loader bucket. No one in their
right mind is going to level off a skip loader bucket in day to day
operations. Geometry of the bucket can have an impact on how much is in it as
well as the skill of the operator. Never mind that some can stick to the
bottom of the bucket when it is being dumped. Actually 20% doesn't sound as
impossibly out of line.
 
Ad

Advertisements

P

Paul Danaher

Golden said:
Paul Danaher wrote: ....

Let's start with something on you kitchen table. Grab a teaspoon.
Shove it in the sugar. Pull it out. Call this one bucket. Was it a
level teaspoon full or a heaping teaspoon full? Now try it with a
different shape of spoon, say one that is deep but small in diameter.
Level they should be the same, but heaping there could be a 20%
variance. Finally consider the supplier may be selling heaping
teaspoons and our poster is selling level teaspoons.

Now realize that teaspoon represents a skip loader bucket. No one in
their right mind is going to level off a skip loader bucket in day to
day operations. Geometry of the bucket can have an impact on how
much is in it as well as the skill of the operator. Never mind that
some can stick to the bottom of the bucket when it is being dumped.
Actually 20% doesn't sound as impossibly out of line.
If you want to be domestic, when I'm cooking, and particularly when I'm
making bread, I take good care to distinguish between a level teaspoon or a
heaping teaspoon. If you're telling me there are people out there happily
selling heaping teaspoons (or skip loader buckets) at the going price for
level teaspoons, then - as I said - I need to move into those businesses,
because we can seriously increase the amount of happiness in the world.
 
A

Allan Martin

Paul Danaher said:
My limited experience is showing - I'd regard 10-20% uncertainty as too
great for this approach, but I always require accounts to reconcile 100%,
so
Then you should adjust your way of thinking, life isn't perfect and neither
is accounting. That is why accounting is referred to as an "art" and not a
"science".
 
H

HeyBub

Paul said:
If you want to be domestic, when I'm cooking, and particularly when
I'm making bread, I take good care to distinguish between a level
teaspoon or a heaping teaspoon. If you're telling me there are people
out there happily selling heaping teaspoons (or skip loader buckets)
at the going price for level teaspoons, then - as I said - I need to
move into those businesses, because we can seriously increase the
amount of happiness in the world.
Interesting aside:

The sages who wrote the Talmud grappled with the same question in trying to
codify God's commandment: "Honest weights and measures you shall have." In
some communities, a "measure" of grain (grapes, whatever), was level with
the top of the measure, in other jurisdictions, the honest quantity was
"heaping." After centuries of discussion, here's their decision:

Use the community standard: if level, level. If heaping, heaping.
 
Ad

Advertisements

A

Allan Martin

I know no one else in this thread will state the obvious but I will. It's in
my nature.

We are all having a heated discussion about a truck load of shit. Are we
pathetic or not?
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads

USA Inventory Adjustment Journal Back to Asset Acct? 4
Inventory adjustment 3
Inventory adjustments 0
Adjusting Inventory 3
Inventory Adjustments 1
Adjusting the inventory... 1
Adjust inventory 0
Adjusting Entry 2

Top