QuickBooks Enhanced Receiving – Yes or No?

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When you order items using a QuickBooks Enterprise Purchase Order, you need to receive those items with or without a Vendor Bill. Receiving posts the value of the items to the General Ledger and, in the case of Inventory, the items are posted to Inventory Assets and the quantities increment both the Quantity on Hand and Quantity Available.

Standard Receiving in QuickBooks Enterprise

Enhanced Inventory Receiving is available only in QuickBooks Enterprise Solutions. As far as I'm concerned, the purpose of this feature is to isolate the receiving process from the Accounts Payable process as much as possible.

Using the standard receiving process for inventory in QuickBooks, the workflow is:

                        Purchase Order -> Item Receipt -> Vendor Bill

But look at the the upper right side of both the Enter Vendor Bill window and the Create Item Receipts window for the small checkbox marked "Bill Received." When that checkbox is checked, this QuickBooks form is a "Bill." When the checkbox is unchecked, it's an "Item receipt" form.

The reality is that they're the same document, even though QuickBooks treats them slightly different. The same transaction within QuickBooks, when using Standard Receiving (by default), is either an Item Receipt or a Vendor Bill.

The only thing that makes them appear different is the little checkbox.

Both Item Receipts and Vendor Bills credit Accounts Payable, while the debit is either posted to an Inventory Asset account if the items are Inventory items, or to a COGS (or other expense) account if they're any item types other than inventory. (Note: The exact account being debited will depend upon how each specific item has been setup when the item was created.)

There really should be no problem with this workflow, but a problem has and does exist because of this duplicate form functionality. I think the problem is best described with an example.

I order 30 widgets (an inventory type item) on a Purchase Order on Jan. 20, 2017. The expected arrival date is Feb. 10.  On Feb. 10, the 30 widgets arrive. I receive them into QuickBooks using an Item Receipt as of the same date. My Item Receipt matches my purchase order in terms of price and quantity.

I now, as of Feb. 10, have 30 widgets in stock and available for sale. On Feb. 12, a customer calls and asks me to ship 20 widgets to them overnight, so I pull 20 widgets off the shelf and enter an Invoice to the customer for those 20 widgets dated Feb. 12. 

At the end of the day, on Feb. 12, I now have only 10 widgets in stock and available.

On Feb. 25, the Accounts Payable clerk receives the Vendor Bill for the 30 widgets I ordered on Jan. 20, and received on Feb. 10.  The Vendor’s Bill is dated Feb. 22 and has terms of Net 30, so the bill is due by March 24.

When she starts to enter the Vendor Bill, QuickBooks shows there is an Item Receipt open for which the Bill has not been posted. She now selects the Item receipt, which now "checks the little box" and the Item Receipt becomes the Vendor Bill. 

The problem is the document is dated as of the receiving date on Feb. 10. So the actual due date of the Bill does not match up based upon the 30-day terms. Now the Accounts Payable clerk changes the Bill Date to match the Vendor’s Billing Date of Feb. 20, so that the terms and Due Date match. She then saves the Bill.

QuickBooks responds to the change in the transaction date. Our QuickBooks accounting, including the inventory count, as well as the A/P liability and the inventory value on-hand, change from 30 being posted into inventory on Feb. 10, to 30 being posted on Feb. 20. 

As far as QuickBooks is concerned, we had no widgets in stock until Feb. 20.

While the example above all occurs within the same "accounting period," you can imagine what happens if the date change between the receiving and the vendor bill crosses an accounting period, such as a month-end or even a year-end.

Ouch!

But that’s not the only impact. What about our sale of 20 widgets on Feb. 12?

QuickBooks now adjusts that sale transaction to reflect the fact that 20 widgets were sold from zero quantity on hand. In other words, we just sold negative 20 widgets. The consequence of selling negative severely impact the value of our inventory asset account and the value of our cost of goods sold. But that's a subject for another article.

With the standard receiving process, we must either live with receiving in a timely manner and manually adjust our Vendor Bill information to conform to real life or, we have Vendor Bills in QuickBooks that match the actual vendor bill and potentially throw our financial information for inventory and COGS way out of balance.

Enhanced Receiving in QuickBooks Enterprise

The Enhanced Inventory Receiving feature available in QuickBooks Enterprise is designed to eliminate this conflict by separating the receiving process and transaction from the Vendor Bill entry and Accounts Payable accounting. 

Without Enhanced Inventory Receiving, when an Item Receipt is posted, QuickBooks increases the amount (both quantity and dollars) of inventory on hand. It also increases accounts payable by the appropriate amount. 

With Enhanced Inventory Receiving, the item receipt increases inventory on hand and increases a new liability account called Inventory Offset.

Even when the bill is created, the item receipt and its accompanying values remain intact. There is no change to posted values, even if a bill is created in a subsequent period.

When the Vendor Bill is posted, the Inventory Offset account is debited for the amount of the Bill, and the Accounts Payable account is credited for the same amount.

Unfortunately, nothing is without complications. Because receiving in Enhanced Inventory Receiving occurs consistent with the Purchase Order, there can be differences when the Vendor Bill arises.

This means that it becomes necessary to reconcile the Inventory Offset account to identify what has or has not, and has differently cleared the account as originally posted by the Item Receipts. 

The volume of transactions typically will dictate how frequently you should reconcile this account, but at a very minimum it should occur monthly. It may be necessary to make manual adjustments to this account, do to cases of non-conformity between the item receipts and actual vendor bills.

More sophisticated inventory systems, including many add-on products for QuickBooks may handle this in a similar fashion but they automatically record differences in quantity or price between the receiving and billing entries using automated entries to accounts like quantity variance or cost variance or even inventory variance. There is less 'manual reconciliation' needed with those systems.

There are two very important matters to ponder if you are considering the use of the Enhanced Inventory Receiving feature. QuickBooks even advises you of both of these 'issues' when you get ready to turn-on the feature.

First, as far as I am concerned Enhanced Inventory Receiving should never be turned on in a file with existing inventory receiving and accounts payable history, as the process of conversion can, and will, alter the financial history of the file.

It was not configured to have a selected start date, so the entire file is transformed as if the feature had been in use from the very beginning.

The second important factor to recognize is that this feature, once turned on, can never be turned-off. It is perpetual, and receiving must, and can only be performed, consistent with the Enhanced Inventory Procedures.

Two QuickBooks forms are forever changed, "Item Receipts" and "Vendor Bills." They are no longer the same form with a little toggle that turns them from one form into another, they are now two entirely separate transactions with their own internal accounting workflow.

Conclusions

While Enhanced Inventory Receiving maybe the best thing since sliced bread for a few users who simply can't keep their A/P clerks from changing Bill dates from what they were set at the time of receipt, for the vast majority of users, the 'standard' receiving process is probably the way to go.

In my way of thinking there really isn't that much 'enhancement' with Enhanced Inventory Receiving, except giving you 'enhanced' headaches.