and now we will learn how to change accounting systems for a company that has merchandise
inventory inventory is an asset it represents the total purchase cost of all merchandise currently
on hand available for sale inventory usually goes up when we purchase merchandise and it usually
goes down when we sell merchandise inventory is another peripheral area of data that has its own
subsidiary set of records where the total of those records have to match the balance in the
general ledger for the t-account inventory before setting up cost and quantity for inventory it is
assumed that the inventory module is active in the software that you're transferring over to
it's also assumed that the inventory related accounts are already in the chart of accounts
and the inventory items are already on the items list so you can learn all about these
things in the complete inventory course right here on this very website so how do we set up
cost and quantity well we make something called an inventory adjustment now inventory normally
changes quantities as well as account balances when we buy or sell merchandise that would be the
normal way however an inventory adjustment changes quantities and the alleged account
balances without recording a purchase or a sale which is the normal way it would change
it's usually reserved for rare situations that change inventory without buying or selling for
example theft spoilage catastrophe those would be the things that would normally change with an
inventory adjustment so what physically happens in the records when we make an inventory adjustment
well the quantities on hand and the cost of the items are directly input into the computer in
one specific window without recording purchases or sales the t-account inventory balances changes as
a result of the new quantity in the subsidiary inventory records always there will be another
account that changes with the t-account inventory if you make an inventory adjustment for example
if the reason why you are decreasing inventory in an adjustment is because of theft then the other
account would be something like theft expense and that would lower your profit and loss and theft
expense would go on the profit and loss report as an expense if you're adjusting inventory
because of a casualty loss then inventory would go down and the account that would go up would
be an expense account that you would record your casualty losses in and lower your profit
and loss and possibly deduct it from your taxes if you donate inventory then the related expense
that will go up is the expense in your chart of accounts for charitable contributions and
so on now when you make an inventory adjustment because you are changing over to an accounting
system then the proper account that changes with the inventory account will always be an equity
type of account it might be the opening balance equity that QuickBooks suggests that you use or
it could be owners capital where the opening balance equity will ultimately get close to so
it would be an equity type of account that changes to balance the inventory adjustment
for example let's imagine in the old system that the day you switched over you had 30
apples at $10 each making $300 worth of apples and you had 40 bananas at $20 each making $800
worth of bananas that means the balance in the t-account inventory was $1100 at
the moment that we finished the old system so how do we put that in to QuickBooks I'm going
to show you first how you would put that into QuickBooks desktop then I will show you how
to put that into quickbooks online so this is what the trial balance looked like after
the prior areas of setup notice the t-account inventory isn't even here because we have not
put any items yet also notice this report the inventory valuation detail this is the best one
to show you the items quantity cost and total value of each merchandise item that you sell
and again it's zero but when we're finished it will look like this it will look like 30 apples
at $10 each and 40 bananas at $20 each and then there will be 1,100 in the inventory account so
let's go ahead and do it from the main menu click vendors inventory activities adjust quantity value
on hand now the adjustment date obviously is the date that you're changing accounting systems and
in our example that's sorry that's March 18th of 2017 okay now all you have to do is choose
the item in this case apples and we're adjusting it with a positive number the new quantity is 30
and we have already put in the items list $10 each that's how QuickBooks knows it's 300 because
we did the basic inventory setup by putting in the list items same thing with bananas bananas
QuickBooks already remembers we put as $20 each so if we put that we're adjusting we're adding
40 bananas from an adjustment that means that the total value of the adjustment is 1100 now
when we save and close this window okay I don't know if you can see it because of the okay but
anyway there's a save and new button or a save and close button okay now the most important
thing is the account for the adjustment and of course because we're changing accounting
systems the equity account called opening balance equity is usually what QuickBooks recommends for
the balancing account when you're starting a new system or changing over to a new system
so we click Save and close now when we look at the trial balance you can see inventory asset
now has a balance of 1100 and when we look at the subsidiary inventory records we see what
we need to see 30 apples at $10 each equals 340 bananas at $20 each equals 800 and that's why
the balance in the t-account inventory is 1100 now the trial balance in our online system has
different values because we've been using these two systems slightly differently in the earlier
videos but the most important number for this example is that the inventory asset is starting
it's zero and if you look at the reports for the subsidiary inventory records the report has the
same name as the desktop version so we agree that we're starting with zero now we want to
adjust inventory click the plus sign click adjust quantity for inventory and you get this window now
even though it suggests an inventory expense related account like inventory was shrinking
and that expense you can deduct from your taxes if you're setting up you really should put an
equity account to balance it out and the products we are adjusting our apples and the new quantity
of apples are 30 so we're going to put 30 and the other one that we're adjusting is bananas and the
new quantity is 40 so we're going to put 40 okay QuickBooks remembers that it's in the items list
that apples cost $10 each in bananas cost $20 each so now when we click Save and close we can
see that the detail of our inventory subsidiary records show we have $300 worth of apples on the
day of setup $800 worth of bananas on the day of setup and if we look at the trial balance we can
see that the inventory asset account is now $1100 exactly what it's supposed to be immediately after
the inventory set up now you may well ask what if your company has receivables and payables well
you must enter the receivables and payables setup first the inventory quantities will be affected by
your accounts receivable and accounts payable set up transactions if you have a merchandise
business after you set up receivables and payables you simply subtract the difference between the
inventory quantities in the old system minus the quantities in the new system that are there after
the accounts receivable and accounts payable setup that will help you find the amounts that you need
to adjust the new system and bring the quantities to the correct amounts as of the set-up date for
example let's imagine in the old system on the day that we transferred we had 30 apples and
40 bananas but in the new system after we set up accounts receivable and accounts payable we
have ten apples and ten bananas so what would we do we would simply subtract the 30 apples in the
old system minus the 10 apples in the new system equals the 20 apples that would be the amount of
the adjustment same thing with bananas if there are 40 in the old system and only ten in the new
system after we set up receivables and payables then we would have to adjust bananas by 30 to
make the number match the old system on the day we transfer over and then the grand finale when
we finish is the main setup journal entry which will now be the numbers on the last day of the old
system minus the numbers in the new system after accounts receivable accounts payable and after the
inventory setup and those differences would equal the amount of the main setup journal entry you