Consignment Inventory is merchandise owned by the business but 
is physically located at another location. The challenge in this
type of situation is to keep clean records of what is where while
developing a system that will also result in accurate financial
statements. This situation comes into play in many different
forms, assembly work that is subcontracted, distributors who
re-sell product but do not ever actually own it, outside sales
reps who carry "inventory" in their vehicle, etc. Consistently
applied procedures are the key to tracking this type of activity.

Consignment inventory is merchandise owned by the business but
physically located at another location. Managing this inventory
requires a comprehensive plan.


Inventory tracking in QuickBooks can become complicated, even
when a business simply buys and re-sells the same items. When
additional requirements are necessary the process can become
cumbersome very quickly. As with any major accounting issue
individual situations may change the appropriate treatment of
transactions, the following suggestions should be confirmed with
the business accountant prior to implementation.

1. Create an "Inventory" type item for product that is sold.
Depending on how the information is needed, sub-items often aid
in managing the list, i.e. either there is a main item for the
location with a sub-item for each specific product (typically
with a designation letter at the beginning) or the product is the
main item with the sub-items being the amount of inventory held
at each location. With the former solution, reports will contain
a subtotal by location which may eliminate the need to establish
multiple inventory asset accounts on the chart of accounts. This
process can be expedited by using the process of exporting the
item list, opening it in Excel, copy the items, use find/replace
to create the new items, and then import the list back into
QuickBooks.


2. If this process starts when there is not any inventory in the
other locations, this step is not necessary. For businesses that
do already have inventory in other locations, the most efficient
way to move the inventory from one item to another when this
process starts is through an inventory adjustment. Be sure to
check the box that says value adjustment and confirm the extended
value matches between the item the quantity is transferred from
and the item the quantity is transferred to. This is a one time
process to establish the correct inventory balances for each
item.


3. For on-going activity, there are three alternatives depending
on the personnel who will be involved (i.e. their QuickBooks
knowledge, their accounting knowledge, the level of detail they
are permitted to see, etc) and the paperwork flow of the
organization.

The first alternative is to enter an inventory adjustment as
inventory is transferred from one location to another (like in
step 2 above). To create a paper trail, consider using the
Journal report filtered for inventory adjustment type
transactions and adding the columns for the item and quantity.

The second alternative is to enter a zero balance invoice with
the positive quantity for the item the product is being
transferred from, and a negative for where the product is being
transferred to. This is an easy way to create a paper trail to
accompany the shipment, the zero balance invoice will not effect
sales tax calculation, and the data entry person does not need to
see or understand the accounting implications of the transfer.
However, all of the cost transfer happens "behind the scenes" so
it is possible the cost of the transfer may not balance between
the two items. The transaction detail should be reviewed by
knowledgeable accounting personnel regularly to ensure the
general ledger detail is being accurately recorded.

The third alternative is to enter a zero balance bill with the
positive quantity for the item the product is being transferred
to and the negative for the item the product is being transferred
from. This method permits control of the cost being transferred,
however, the cost that appears automatically on the bill is the
cost that was entered on the item itself, not the average cost
that has been calculated as the item has been purchased and sold.
To permit accurate costing of the item from one to the other,
create an inventory valuation summary report and use the average
cost column to value the inventory for the transfer. This method
does require that the data entry personnel have access to the
cost information and does understand how to implement the
procedures.


4. As with any inventory system, inventory counts (both partial
on a regular basis and a full count at least annually) are
recommended, reports should be reviewed to confirm the procedures
are being followed and no modifications are necessary. Inventory
can be very useful in the management of the business, cash flow,
etc. but it does require a commitment of all parties to check and
double check that it is working properly.


As a resource for this and other questions, submit a question via
"Ask the Expert" or attend our free, monthly discussion forum
tele-class at http://www.4luvofbiz.com. 

Bonnie J. Nagayama, CPA has been featured by Intuit in their 
QuickBooks Advisor Spotlight and frequently teaches and consults 
on using QuickBooks to its maximum advantage. For a FREE weekly 
newsletter of QuickBooks tips and tricks, plus many free and 
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