I’ve talked about the problems that you can run into with the optional Enhanced Inventory Receiving (EIR) function in QuickBooks Enterprise V12, but there are still situations where you may find that this feature is needed. Let’s talk about some workarounds that are available for one of the big problems.
I’ve written about the inventory offset problem, where you can create an improper posting to the inventory offset account by adding items to a bill that weren’t included in the item receipt. For example, if the item receipt includes several inventory items, but you add a shipping charge (using, for example, and other charge item) to the bill, that shipping charge is posted to the inventory offset account, but it is never cleared. The workarounds that I offered earlier were to either pay for the item with a check or credit card charge rather than using the receipt/bill approach, or to add that shipping charge to the expenses tab instead of the items tab on the bill. These aren’t the optimal ways to deal with these kinds of charges, so these workarounds aren’t a satisfactory way to resolve the problem. They do avoid the inventory offset problem, though!
Just the other day Von Smith asked some questions in a LinkedIn group discussion that got me thinking about some other ways to get around the problem. I’ll use adding a shipping charge to a bill for my example.
First, let’s recap the problem. Keep in mind that this occurs when we enable Enhanced Inventory Receiving in QuickBooks Enterprise V12, which lets you create a separate item receipt and bill transaction when receiving inventory items – where normally the receipt and bill are just one transaction.
- Receive some items using an item receipt. The estimated value of these items is posted to an inventory offset account.
- Create a bill for that receipt, and add an other charge item for the shipping charges that were included in the invoice from your supplier. The inventory offset account is supposed to be adjusted down by that same estimated value from the item receipt. However, the problem is that the value of the shipping charge is also removed from that account, which is not correct. The inventory offset account is out of balance.
You can avoid this by not using the other charge item, instead posting the shipping charge directly to your G/L by using the expenses tab in the bill. However, that isn’t the way that we recommend that you use QuickBooks. Best practices recommend that you try to use items whenever possible, rather than posting directly to an account.
Modify the Item Receipt
Since the problem with the bill is that it contains a charge that doesn’t show on the item receipt, one simple fix when you receive the bill is to go back to the original item receipt and add that freight charge item. In fact, maybe you could just add that freight item when you enter the original receipt?
You have to be careful, though, because you don’t want the freight charge showing showing in your accounts on the receipt date. One of the main reasons for using EIR is to get the actual costs of the bill to show on the date of the bill, not on the date of the receipt. The simple fix for this is to make sure that your Freight item has a zero cost value. You are just entering a quantity of one for freight at this point, and if you have a zero cost for the item there won’t be a value posted to the inventory offset account.
With a zero-cost freight item in the item receipt, you can now enter the actual freight cost in the bill. EIR adjusts the inventory offset account by the value of the item used in the receipt, which is zero, so you don’t get an incorrect posting when you update it in the bill.
This is a fairly simple workaround as long as you have your items set up correctly to begin with. You still are using the items tab as we prefer, and costs show up in the right amount at the right time.
In many cases you will want to incorporate the freight cost into the cost of the items – this is referred to as the landed cost of the item. There are several ways of handling that in QuickBooks (see my article on shipping costs and QuickBooks inventory), although I wish that QuickBooks handled it more smoothly.
In this case, when the freight charge is a part of the bill for the receipt, simply include the freight charge in the amount for the item. In my example, the cost of the received item was $12.00 and the freight was $2.00, so I enter the amount as being $14.00. This will still manage the value in the inventory offset account correctly.
It is more complicated, of course, if you have multiple items in the bill. You have to allocate the freight cost across the various items manually. You still are using just the items tab, not the expenses tab, and the inventory offset account is managed properly.
Is It OK to Use EIR?
I continue to have reservations about the EIR function at this time. There are other problems, such as the bill linking problem for example. Also, I worry that the way that the program manages the inventory offset account may still have problems. Keep in mind that enabling EIR is a one-way street. You cannot turn the feature off once you enable it, without going to a backup copy, creating a new company file, or using an expensive third-party service.
When I was playing around with bills and receipts for this article, adding and deleting and adjusting various transactions, after awhile I ended up with incorrect values in the inventory offset account that could not be explained by the current state of the transactions. QuickBooks got confused if I made multiple adjustments to transactions that affect this account.
- Create a receipt for an item, and add the other charge item (with a zero cost). Using my example above, this would post $12.00 to inventory offset.
- Create a bill for that receipt, and adjust the item cost to include the freight charge (as in my landed cost example). Don’t enter a value for the line with the freight charge. Inventory offset is properly adjusted down to zero.
- Delete the bill. This should set inventory offset back to $12.00, the cost of the item without the freight charge. However, in my test, inventory offset is set back to $14.00, which is the updated (landed) cost that I entered, not the original cost. I now have $2.00 too much in inventory offset.
This will self correct later – if I again create a bill for this receipt it will remove the $14.00 value from the inventory offset account. However, that is placing too high of a value in the account for the interim period of time. I’m not sure if this is a major issue, but it isn’t correct and I don’t like it when small details like this aren’t accurate.