How to Set Up QuickBooks Inventory Adjustment Accounts
We've published several articles about posting inventory adjustments. QuickBooks automatically creates an inventory adjustment account in the Expense section of the chart of accounts, but many accountants prefer to use an adjustment account that is a Cost of Goods Sold account. QuickBooks issues an error message when you post adjustments to a COGS account, but you can select the option to stop displaying the message.
On a slightly different issue regarding inventory adjustments, several readers have written to say they're confused about the number they see after they post their year-end inventory adjustments. These readers all ended up with more inventory than the quantity shown in QuickBooks when they finished their physical count. They found the negative number that was displayed on the Profit & Loss report confusing and wanted to know if they'd done something wrong.
If your inventory adjustment increases inventory, that's a reverse expense (both Expense accounts and COGS accounts are expenses) and will contain a minus sign. Of course, if previous adjustments had produced a reduction in inventory, the amount you see is the net.
If you want your reports to be clearer, create two QuickBooks subaccounts under your Inventory Adjustment account: Inventory Loss Adjustment, and Inventory Gain Adjustment. Always post to one of the subaccounts; don't post to the parent account. If the parent account currently has a balance, do a journal entry to move the balance to the appropriate subaccount. The parent account will show the net amount, which could be a negative amount, but the numbers in the subaccounts will explain that.
Note that QuickBooks recommends an Income account for adjustments that increase inventory and an Expense account for adjustments that decrease inventory. Don't do this – it's the quintessential definition of "records and reports that will confuse you". Your inventory adjustment information should be in one place in reports, and you should always be able to see a "net" amount.