Adjusting historical inventory values

There are a few ways to complete a historical inventory adjustment.

The first way is to do a general journal entry to debit or credit the account. Make sure your debits get a positive quantity and credits get a negative quantity. Remember, it’s easy to adjust your inventory this way, but you need to make sure it’s okay to mess with your quantity on hand first.



 

You can also do an in/out inventory adjustment to change the value, but leave the quantity the same. However, this requires making two entries to the inventory account, which can make things look messy depending on how many times you need to make these types of changes.

You can also do a bit of math and keep your correction to a single entry against the account. This is harder to do, but offers the benefit of being a single entry that leaves your quantity untouched.

Remember, it doesn’t matter what date you adjust at. What matters is that there are transactions occurring after the date you’re adjusting at.

Let’s look at an example.

Let’s say we’re generating financial statements for the end of Q1, March 31, 2015. We want the unit price to be $235.00 per tonne instead of the current $140.00 per tonne.

The only way to adjust the value using a single entry to the account and leave the quantity unaffected is to use the Adjust Value tab in the Inventory Adjustment screen.

If you try to make the entry like this:

Your report will look like this:

And your value will be $2,173.18 per tonne.

This is because when the Inventory Adjustment screen calculates an adjustment, it uses “today’s” quantity on hand and unit value, not the numbers that existed on March 31, 2015. 


To properly adjust historical value:

1. Determine the current total value at the date you’re adjusting to: March 31, 2015 – Current Balance $1540.00 (A)
2. Determine the desired value at the date you’re adjusting to: March 31, 2015 – Desired Balance $2585.00 (B)
3. Subtract (A) from (B) to get your desired change: 2585.00 (B) – 1540.00 (A) = 1045.00 (C). Note: If (C) is a positive number, you’re going to add to your inventory value. If (C) is a negative number, you’re going to reduce your inventory value.  
4. Open your Inventory Adjustment screen and select the Adjust Value tab. Before you enter any unit value adjustment, you need to consider how the program will make your calculation you don’t end up with trouble like the last example. Note the current quantity on hand 216.000 (D).
5. Divide 1045.00 (C) by 216.000 (D) to equal 4.84 (E) Desired Change. Note that the current unit value is 131.4583 (F).
6. Add 4.84 (E) to 131.4583 (F) to equal 136.2983. This is the amount you need to get the desired value change at March 31, 2015.
   
   

Let’s see what our report looks like with the adjustment posted this way:

Calculation formula

Before entering any numbers, make sure you get all of the information you’re going to need.

Current Balance: __________________ (A)

Desired Balance at adjustment date: ____________________(B)

Desired Value Change (A-B): ______________________(C)

Current Quantity on Hand: __________________ (D)

Desired Unit Value Change (C/D): _____________________(E)

Current Unit Value: ____________________(F)

((Desired Balance (B) – Current Balance (A)) / Current Quantity on Hand (D)) + Current Unit Value (E)

                                                                                        OR

(Desired Change (C) / Current Quantity on Hand (D)) + Current Unit Value  (E)

                                                                                        OR

Desired Unit Value Change (E) + Current Unit Value (F)

= Unit value required in Inventory Adjustment Screen __________________________

Last updated on September 2, 2016 by FCC AgExpert