QuickBooks has traditionally let you sell more than you have in stock for inventory and inventory assembly type items. When you do this, the item’s quantity becomes negative and the item's average cost is skewed on associated transactions. To address this issue, a couple of changes have been made in QuickBooks Enterprise over the last few years that can resolve 'negative inventory'.
One of the changes involves an optional preference that will prevent negative quantities by preventing the sale of quantities that would take an inventory item below zero. That feature is NOT the topic of this article.
But another feature that can prevent negative quantities by improving preserving the inventory receiving process, is also found only in Enterprise. This feature is most likely to benefit those users with major inventories including retail, wholesale, and manufacturing. That feature is 'Enhanced Inventory Receiving' (EIR).
The EIR feature was added several years ago and allows for an item receipt created as of one date, while the related bill may have an entirely different date. In theory, this is a better approach since you are no longer changing the date of an item receipt to have it match the Vendor’s Bill, or having a Vendor Bill with an earlier date based on when the item was received. This feature is designed to preserve the integrity of the inventory and accounts payable balances by date.
The purpose of this article is not to describe how to implement or use Enhanced Inventory Receiving, rather it is intended to cover an essential accounting function that needs to be performed when you have chosen to use EIR. With that said we should review both the standard QuickBooks ‘receiving / vendor bill’ configuration as well as how EIR differs in those respects.
When we receive inventory in QuickBooks without Enhanced Inventory Receiving we are essentially posting a ‘vendor bill’ even if the receiving voucher is marked as an “Item Receipt” rather than a bill. In this case the inventory items are ‘debited’ against the appropriate Inventory Asset account and the credit is posted to ‘accounts payable.’ Although it is increasing the Accounts Payable account, you will not see it in the Pay Bills window until you mark the Bill Received.
EIR Figure 1
The most important aspect of receiving is the ‘date’, because this date determines when the items become part of our inventory quantity on hand/quantity available. But in QuickBooks there is absolutely nothing different between an Item Receipt and a Vendor Bill other than the ‘title’ appearing on the document. If the little 'Bill Received' box is checked, the Item Receipt suddenly becomes a Vendor Bill.
The problem comes when the Vendor’s Bill is received, and the Accounts Payable clerk converts the Item Receipt to the Vendor Bill, and then changes the date to match the date on the Vendor’s Bill so that the payment due date is consistent with the terms. By making this ‘date’ change, the inventory ‘as of’ date is changed from the receiving date to the billing date. In many instances can mean that the inventory which got sold (or committed, or even used in assemblies, because it has been on hand as of the received date) is now not available as of that date but several days later (the billing date).
This has serious ramifications upon inventory, especially in the manufacturing environment. Without Enhanced Inventory Receiving, if you want to keep the original inventory availability date, you must make certain to leave the date the same, or click the Use Item Receipt date, for the bill date option on the Select Item Receipt window.
Here is an example of an Item Receipt with Enhanced Inventory Receiving turned on. Note that you can’t turn this receipt into a bill, the little ‘Bill Received’ check-box is gone and there is no ‘Bill’ or ‘Credit’ toggle either.
EIR Figure 2
Enhanced Inventory Receiving Item Receipts don’t post against your Accounts Payable, rather this function creates a new Other Current Liability account in your Chart of Accounts called Inventory Offset Account. When you enter an item receipt the inventory is still debited against the appropriate Inventory Asset account for the items you are receiving but the off-setting credit is posted against this Inventory Offset Account. The Item receipt determines the date the inventory is available for ‘on hand/ and/or ‘available’ status.
When you enter the Vendor’s Bill, QuickBooks will create a journal entry that debits the Inventory Offset Account and Credits Accounts Payable. You then proceed normally with the Vendor Bill Payment Process.
The big difference here is timing, the Vendor Bill in QuickBooks can actually correspond to the Vendor’s real Bill, and it has absolutely NO impact upon the availability of inventory.
There are several potential issues with Enhanced Inventory Receiving, including when the Vendor’s billed amount is different than the amount associated with the Item receipt. Obviously in this case, as in some other EIR related situations, there is a need to ‘reconcile’ the Inventory Offset Account to identify the irregularities.
EIR Figure 3
Once you turn on the Enhanced Inventory Receiving function it becomes necessary to reconcile the Inventory Offset Account on a regular basis, you can create a report to assist you in seeing what hasn’t cleared. While the volume of transactions may dictate how frequently you may need to reconcile this account, you should perform the reconciliation at least monthly, and more frequently if you have a large number of transactions being processed.
While in theory this account should be zero, it really never will be because you will almost always have Item Receipts that have not yet been off-set by their corresponding Vendor Bills. But as I mentioned one of the primary reasons to reconcile the account occurs when you have Vendor Bills that do not match their corresponding Item Receipts. We will look at this situation in a few minutes.
The ‘bank’ reconciliation feature is a great way to help you manage the reconciliation of the Inventory Offset Account. Open the Reconcile feature from the Banking menu.
EIR Figure 4
Then select the Inventory Offset Account as the account to be reconciled. You will want to make the assumption that the account ‘should clear’ to zero, so enter the Ending Balance amount as $0.00. Then click Continue.
Review each of the Charges and Payments reflected in the transaction display on the 2nd screen of the Reconcile feature. Place a check-mark next to the transactions that match.
EIR Figure 5
In the example shown above, there is an amount for Phillip Pump Manufacturing on the left and several transactions on the right with the same vendor and date. Checking them all will result in a zero cleared balance.
Continue doing this for the other transactions that match. Once you are done, click the Reconcile Now button. The next time you reconcile, those transactions will no longer appear and you can work with the transactions that haven’t previously cleared.
It’s possible to have an Item Receipt in EIR that doesn’t match the Vendor Bill. There are many reasons this can happen, the Vendor may have included freight on the Vendor Bill, but freight was not included on the original Purchase Order or the Item Receipt. Of course you might have a situation where you have posted a Vendor Bill but an Item Receipt was never entered even though the order was received. In either of these cases an amount will be posted in the Inventory Offset Account that doesn’t clear.
In order to help you track down such situations, you should prepare a QuickBooks report reflecting all of your un-cleared transactions within the Inventory Offset Account. In order to produce this report, first select Reports, then Accountant & Taxes. Now select Transaction Detail Report by Account. When the report opens, select Customize Report.
EIR Figure 6
Choose the Filters tab and change the Date to All, under Accounts, choose the Inventory Offset Account, and under Cleared Status option, select No. If you wish, you can change the Total By option to Vendor so that all transactions for a specific vendor will be grouped together.
EIR Figure 7
If you follow these steps on a regular basis, rather than waiting till you have a large number of transactions, you should be able to reconcile the transactions that match, and easily identify those that do not. Once you identify the Uncleared transactions, and potentially why they don’t match, you should then be able to research the cause and resolution.