As with almost anything else, a discussion of inventory in QuickBooks begins with preferences.
The option for “Inventory and purchase orders are active” must be checked or inventory features in QuickBooks will not be available. The other options are fairly easy to understand and can be changed at any time if the setting is not meeting the needs of the company. The Unit of Measure feature can be enabled from here or “on the fly’ as creating items.
Once preferences are set to allow the inventory features to be used, the next step is to setup the inventory items in the QuickBooks file.
This is the setup window for a new Inventory Part type item in QuickBooks. Notice that when the type of item is chosen from the dropdown at the top of the window, the contents of the window change rather dramatically as the accounting for inventory part items is very different from that of other items.
When an inventory item is purchased (let’s keep it simple and say the inventory item was purchased with a check), two things happen.
- An asset account (Inventory Asset) increases in value, the company owns more ‘stuff’
- The checking account is reduced in value as a result of writing the check for the inventory
When an inventory items is sold, four things happen.
- The asset account (Inventory Asset) decreases in value, the company owns less ‘stuff’
- The expense Cost of Goods Sold is increased, this is the expense of the items sold
- A sale is created, so sales dollars go up
- Money is received in payment, so cash (or the checking account) goes up
It is for the purpose of all that accounting that the setup of an inventory part type item in QuickBooks is more complicated than other item types.
Below is the screenshot of a completed inventory part type item.
The type of this item is, of course, Inventory Part. The item name is LBL C 100 ML and it is a sub-item of Label. The purpose for creating sub-items in QuickBooks is to control where they will display on the list when searching for an item to buy or sell. The items will display alphabetically within their respective groups. The QuickBooks user should think carefully about the way items are named. The name will control how they appear on the list and help determine how easy or difficult they are to find.
The Purchase Information section contains information used in the purchase of the items. The description will show on purchase orders and other purchase documents when the item is used. The cost will fill in on the purchase form as well, although it can be changed there and it serves no accounting function. QuickBooks could assign a cost much different from this one to the item for accounting purposes. The cost of goods sold account is the QuickBooks account that will be assigned the cost when the item is sold. The preferred vendor is an optional field that is for informational purposes.
The Sales Information section contains the description that will appear on sales forms along with the default price that will appear on those forms. The price can be changed each time an invoice is created if need be. The setup in the section determines whether or not the item is taxable or not. The setting here will be over-ridden by the customer setting at the time of an actual purchase. This item is marked as taxable but if it were placed on an invoice for a customer that had been setup as a resale non-taxable customer, the item setting would be over-ridden. The income account is the QuickBooks account where the income from the sale will be recorded when a sale is made.
The bottom section is Inventory Information. The Asset Account can be changed but rarely should that happen. Almost always it should be left as Inventory Asset. The re-order point helps QuickBooks mark which items need to be re-ordered on certain reports. The other numbers in this section are written there by QuickBooks and cannot be changed. How many are on hand is the first entry. Average cost is the second and this number cannot be changed in this window. QuickBooks computes this number.
As previously stated, the QuickBooks user can put any cost desired in the Cost field, but the Average Cost, which is used in all accounting entries, is computed by QuickBooks.