If you work with inventory in QuickBooks you are probably aware of the hassle of receiving inventory and the related billing – you can’t disconnect the receipt from the bill. There are a number of problems that come up because of this, and the workarounds are a hassle. Now, with QuickBooks Enterprise Solutions 2012 there is a fix, but it is important that you understand this before you use it, because once you select this option you can’t change your mind!
(This article was updated 9/9/2011 and 9/28/2011)
Problems with Item Receipts
In QuickBooks an item receipt and the bill for that item receipt are one transaction. You can’t separate them. You must have a one-to-one ratio of bill and item receipt (since it gets wrapped up into one transaction). This creates a number of different problems depending on your situation. Each of these have a workaround, but workarounds are not the best way to operate your business.
Here are a few of the problems you can run into with the standard method of receiving items in QuickBooks:
- You may need to pay for items you have received before you actually receive the items. Entering a receipt with the accurate billing date increases your inventory before it should.
- If you enter an item receipt, and later you enter the bill, most people will change the transaction date to be the bill date so that the accounting transaction for the bill is accurate. This changes the item receipt to that same date. This can have far reaching consequences such as changing COGS calculations and possibly even turning inventory assembly build transactions into pending builds.
- What if you receive a bill from your vendor that covers several different item receipts, on different days? QuickBooks doesn’t provide you with a simple way to deal with this, as there must be a one-to-one relationships between bills and receipts.
- What if you receive multiple bills from your vendor for one item receipt? QuickBooks again doesn’t provide you with a simple way to deal with this, as there must be a one-to-one relationships between bills and receipts.
- In many businesses proper procedures will separate the inventory receiving department from the accounts payable department. QuickBooks makes this a single transaction, so you can’t make that separation.
To solve these problems, Intuit has introduced an optional feature, Enhanced Inventory Receiving, which is available only in QuickBooks Enterprise Solutions 2012.
This separates the item receipt from the bill, which should resolve each of the problems that I list above. However, I want you to think about this feature carefully before you jump in, as there are a number of potential problems and yellow caution flags waving here.
Enabling Enhanced Inventory Receiving
Note that with a large QuickBooks company file the conversion process that you will go through to enable this feature could take a very long time. Possibly several hours. Schedule this conversion for an off time.
In fact, I highly recommend that you test this first by making a copy of your company file and testing it with that copy. Understand what the process is going to change before you put this into production.
To turn this feature on, go to the Items & Inventory preferences and click the Enable button. Note that next to that is a Learn More link. I highly recommend that you read this information.
If you have set a closing date in your company file, you will have to enter the closing date password. Why? Because this process is going to change transactions that occurred in prior periods.
After that, you get ANOTHER warning. This is good – Intuit is definitely concerned about the impact of this change and they want you to understand it clearly. I’ve talked to the product manager at Intuit, Catherine Fisse, and she was very clear that Intuit wants people to understand the changes and think this through.
The program will make a backup copy of your file, which is GOOD since the conversion process isn’t reversible! You may find that the file cannot be converted – if there is any damage in the file and it won’t pass a “verify”, you will have to rebuild it and possibly correct any errors before proceeding.
When the process is done you will see a summary window similar to the following. Note that this test was run on a very small file with very few transactions, so it went fast and didn’t create any problems.
Pay careful attention to the changes that are listed here. Capture the screen, as I’ve not seen any place that you can get this information later.
Note that it says it is updating existing transactions? All of your inventory bills from before the conversion have been split into Item Receipts and Bills now. Before conversion a Bill was one transaction handling the billing and the receipt. Now there are separate transactions for the bill and for the item receipt.
How Enhanced Inventory Receiving Changes QuickBooks
There are a number of screens and processes that are going to be changed.
Here is what we have without this feature enabled. Note the path on the home page.
Here’s a normal item receipt. Note that you can turn on the bill received option, and that you have both an Expenses and Items tab.
Now, let’s take a look at this with Enhanced Inventory Receiving enabled. See the separation in the Home Page
Here is the item receipt. Note that you can’t turn this into a bill, and the expenses tab is gone.
Enhanced Inventory Receiving will create a new Other Current Liability account in your Chart of Accounts called Inventory Offset Account. When you enter an item receipt you will have a journal entry (these next two graphics came from the Quickbooks documentation).
QuickBooks will create other journal entries when you enter a bill or payment against that item receipt.
(Updated 9/9/2011) If you use a check or a credit card to purchase the items (using the items tab) QuickBooks does the same as before. It debits the Inventory Asset and credits the bank or credit card.
This is a big change, and it can be a bit overwhelming to understand. However, you need to read all of the materials and study these changes before taking the leap.
What To Watch For
I’ve said it several times already, but it is worth repeating. Understand the changes before you implement this feature.
There are a lot of good changes with this feature. All of those receipt/bill problems I list at the beginning go away. You improve the separation of inventory and payables, you eliminate timing problems, you eliminate the confusion over bills that don’t match receipts.
However, I have some concerns for you to think about.
You can’t turn this off once selected. I understand why this has to be, but if you make the change and don’t like the results, you can’t go back other than to restore an old backup file.
This creates many more transactions than before. You used to have a single bill transaction, now you have a separate bill and item receipt. That doubles the number of transactions for this activity. You also have many journal entries being created. If you have a company file where the volume of transactions is a concern, this can create problems. This will also make your company file bigger, which is a concern for some people. Update: Intuit says that I’m overstating this, as there may not be as many journal entries as I anticipated. You still are doubling the transaction count for receipt/bills, though.
This can change prior period financials. In early tests I found a number of situations where the financial statements for prior periods were changed. I haven’t tested this with a complicated test file with the latest release, and I believe some of the early problems were resolved. However, you can find that prior period values change. You can get around this by not relying on your current file to print prior period financial statements, if you have backups of the prior year company files. But that is another workaround. Also, I’m concerned that you have to make some journal entries to get the beginning balances back in alignment with your prior financial statements, but note that I have not yet investigated that fully.
Does this create problems with the IRS in an audit? Well, maybe. You are modifying the file for the period that may be audited. As discussed before in this article, it isn’t always clear what the IRS thinks is proper. Again, the workaround on this is to use a backup copy of the file that matches your tax filings. Note that I’m not sure that there is an issue here, I’m not a tax accountant or lawyer. I’m just wondering…
This might interfere with some third party add-ons. I don’t have any specific instances where I’ve seen this, but it is possible. Note that Intuit announced this change to software developers many months ago, which is good. However, I’ve talked to several developers who were not aware of the change, in spite of the warnings that were given. Not Intuit’s fault- people just don’t always see these notifications or understand the impact. The programming interfaces that developers use are in the process of being changed to accommodate this update, but at the time I’m writing this the developer tools are still being beta tested. If you have a third party add-on that relies on bills being an indication of an item receipt, now the bill is separated and the program might have a problem.
Inventory balances may change. Here is my QuickReport for an item receipt from before I enabled Enhanced Inventory Receiving.
After the conversion, here is the QuickReport for that same item.
Now you see this is an item receipt, not a bill. However, look at my total on hand as of 9/30/2011. Note that they are different between the two reports? I haven’t dug into this issue to see why it happened in this test case.
If you are starting a new company from scratch, the impact isn’t as big. You aren’t going to be adjusting prior periods. You still have to worry about the change in workflow and the increased number of transactions.
Test these changes out before you jump in. Copy your company file, print financial statements and inventory balances, test the conversion and compare the reports. Does this change your financials? Does this change inventory balances? Does this change your Payables? You have to investigate that and decide on how you will adjust to those changes.
Make Backups, Make Backups, Make Backups. You can’t turn this feature off, so protect yourself.
Study the changes in the workflow to make sure that this works for you. It does change things, it can create more work in some situations.
Study the list of reasons FOR using this to see if it helps you. If you don’t have those problems, don’t make the change.
Consider waiting until another revision because the early adopters of this feature are going to be the real test of how well it works. I never like to be the first to try this in a real world environment.
I’m throwing a lot of cautions out here, but I want to make it clear that I think that this new feature provides many benefits to some businesses. A lot of work has gone into this, and based on conversations with the Intuit people I know that they understand the complexity and the issues that are here. This is a good option, I just want everyone to think about it before jumping in.