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For businesses that sell products, keeping track of inventory and your cost of goods sold (COGS) is vital. If you're not careful, inventory valuation and COGS may not reflect your true business progress. In this part, we'll show you how QuickBooks handles your Items and places the numbers in the correct accounts. Contents A Little Review of QuickBooks' Items A Little Review of QuickBooks' Items
To get to the Item list, look in the Lists menu. We'll be primarily discussing Inventory, Non-Inventory and Service Items here.
How the Accounting Should Work In accounting, when you purchase something for resale, you increase (debit) the value of your inventory assets. In exchange you increase (credit) your liabilities such as accounts payable or decrease another asset account such as your checking. It does not become part of your sales transactions, or profit and loss accounts, until a sale is made. Once a sale is made, the cost value of the Item you sold is transferred from your inventory asset account to the Cost of Goods Sold (COGS) account. The money you receive for this Item is then recorded in your Gross Sales account. From this, your gross profit on the sale of the Item can be determined: Gross Profits = Gross Sales - COGS In the accounting world, as well as cases in the tax world, these transactions should happen reasonably near to each other so that the income and expenses are matched in the same accounting period. This gives you a true picture of how your business is performing in the former and so the correct tax you owe is determined in the latter case. You also need a way to determine your Cost of Goods Sold at tax time separately from your other expenses. At least, this is how it should work. In QuickBooks, that is not always the case. We'll show you why and how to correct this later. How QuickBooks Records Item Transactions As mentioned above, the major difference between Inventory and Non-Inventory Items is that QuickBooks does not track the quantity or value of Non-Inventory Items. What does that mean? When you create an Inventory Item, you enter the COGS and Income accounts. Let's use a store that sells brooms as an example. When you order some brooms and they are received, their value is entered in the Inventory Asset account.
When a broom is sold, the $5.00 cost of each of these brooms is transferred to the Cost of Goods Sold account and the money you received for them, $9.99, goes to the Sales account. We'll ignore the sales tax since QuickBooks handles that separately. This is how it should work. Now take the case of a Non-Inventory broom. When the dialog box opens and you select a Non-Inventory Item, the dialog below in Figure 3 is shown.
Notice there is only one account. If you create the Item using the dialog box as-is, every time you purchase more brooms, the cost would be subtracted from the Sales account. Every sale would be added to it. That satisfies the income - cost equation for determining gross profits above. (See Fig. 4 below.) However, how would you determine your cost of goods at tax time? You would have to wade through all your sales transactions to find the total purchases. This could be very time-consuming if you had a lot of transactions. (See Fig. 5 below.)
If we just select the box labeled "This item is purchased for and sold to a specific customer:job", the dialog box changes to that shown in Figure 6 below.
Notice how the dialog box is now similar to the layout for the Inventory Item. You can assign both an expense account, which we have designated as the Cost of Goods Sold account, and an income account. This now solves our problem of tracking our cost of goods sold both for accurate accounting and also for our tax returns. A Service Item works similarly to a Non-Inventory Item except you may want to make another expense account for Outside Services or Subcontracted Work. With the expanded Service item, you can enter the expense account you use for the work you "purchase", such as subcontracted labor. You can then add your markup to the "purchase" price and it will show correctly on the sales forms. Check with your accountant on how you should be handling this. So far, we've reviewed some of the Items QuickBooks uses in your sales transactions and we've discussed the different accounts used to keep track of the cost and money received. Inventory Items, by the way they are designed, keep track of all of the costs you incur and sales you make automatically. Non-Inventory and Service Items do not track these costs as initially configured. In this case, you have to sort through your sales transactions account(s) to find the costs associated with your sales when it comes time to do your taxes. You have to make use of the "This item is purchased for and sold to a specific customer:job" feature to allow you to specify the COGS (or outside labor) accounts and the income account. In Part 2, you'll find there are some pitfalls to inventory valuation. There are also some things to be wary of when using Non-Inventory and Service Items. 15 January 2002 |
Copyright © 2000-2005 by HELP! Small Business Solutions
All Rights Reserved
QuickBooks maintains many things about your business in Lists.
Among them is the Item List. Everything that you buy with the
intent to resell is considered an Item. This could be a part
or a complete product. In QuickBooks, Items also can be a service
that you subcontracted or performed yourself. They also may be any charges
you have incurred that you want to pass along on an invoice. Sales tax
is also considered an Item in QuickBooks since it also appears
on your sales documents.
