Inventory adjustments are a fact of life, things disappear, get broken, become demos, get used in the business, become obsolete, etc. When that happens you have to adjust the number on hand. When you make the adjustment QB has to know what “Adjusting Account” to use. There is no hard and fast rule, but common sense should prevail.

When you make the adjustment QB takes the value of the item(s) out of inventory asset and puts that value in the adjusting account (some kind of expense) you pick.

If you use the item as a demo or in the business – Use an expense account that reflects what you are doing, promotion expense, advertising expense, operating expense, etc. And don’t forget use tax applies.

If you take the item for personal use use the owner equity drawing account. And don’t forget use tax applies.

If it just disappeared, broke, or became obsolete, then I would suggest a COGS-Spoilage account which reports on the Other line on IRS forms where you calculate the cost of inventory.

Michael went into this aspect further direct with the IRS and was kind enough to forward his conversation to me. The net result is that while you use the COGS-spoilage account you do not report it when calculating the COGS part of the IRS return. That adjustment was already included in the ending inventory value found on the balance sheet. The COGS-spoilage account is just for balancing the books when you make the adjustment. (see if I was a trained accountant I would have known that) Thanks Michael.