Write on inventory to record upward adjustments (increases) of inventory when no purchases have occurred. Situations where write-ons may be necessary include:
When inventory items are written on, they are available for sale or production, so they must be added as assets in the Inventory on hand account. Their value must also be added to some income account or subtracted from some expense account to offset the increase to Inventory on hand.
Upward adjustments of inventory are recorded with journal entries. The debit leg of the journal entry is posted to Inventory on hand (or another control account if the inventory item in question has been assigned to one besides the default account). The credit leg is posted to an account designated for the purpose. The specific account used is not as important as consistency. Options include:
While the adjustment quantity is known, write-on value is not always easy to determine. Several possibilities exist:
Local law or accounting standards may dictate how write-ons should be valued. Be sure to follow any such guidance.
However you determine unit cost, multiply by the number of units being added and enter the product as the debit amount of the journal entry. (Manager will not perform this calculation automatically as it does in many other transactions. However, you can enter the calculation into the
Debit field to avoid manual calculation.) The credit amount, of course, must balance. Multiple inventory items can be adjusted with a single journal entry by including additional debit line items. Only one credit line for the total amount is necessary.
Brilliant Industries conducts a year-end physical count of stock on hand and discovers two more table lamps than its records show. The listing in the Inventory Items tab initially looks like this:
Brilliant creates a journal entry, debiting Inventory on hand and selecting the table lamp. It uses the average cost method, multiplying 196.06 by the two units, for a total debit of 392.12:
The two units are added to the quantity on hand (and owned) without altering average cost. But the total cost of table lamps in Inventory on hand goes up:
The credit from the journal entry appears in the Inventory adjustments account. Because Brilliant expected most inventory adjustments to be write-offs rather than write-ons, it set this account up as an expense account. So the 392.12 became a contra entry, moving the balance of the account in a negative direction:
If a different costing method had been used in the example above, average cost of table lamps would have changed.