To track inventory, QuickBooks relies on the setup of a specific item type designed for just this purpose. The inventory item type.
To have access to inventory type items, one must have activated the inventory feature in QuickBooks. This is done at Edit->Preferences->Items & Inventory->Company Preferences.
With the option checked as shown, inventory features are available in QuickBooks.
While it sounds basic, it is very important to remember to always buy and sell items being tracked as inventory using the inventory transactions in the software. It is not uncommon for people to track items they sell as inventory, so they will know the sales history of the individual items.
Sometimes these QuickBooks users will neglect to buy these items using inventory items, causing the tracking features in QuickBooks to be useless and the numbers in financial reports to be wrong.
Let’s look at how the inventory item works in QuickBooks to better explain the importance of using the right transactions at the right time.
The edit window for the inventory part Brass Hinges is shown above. As you can see from the information in the window, it is a subitem of Hardware.
Whether a part is an item or a subitem has no effect on accounting numbers. It merely controls where an item shows on the item list. That list order affects how the list is displayed when searching for an item to include on a transaction like an invoice or bill.
There is a field for Manufacturer’s Part Number. This is blank in the illustration and is an optional field. If used, this field will show on certain inventory reports, potentially helping in the re-order process.
U/M Set stands for unit of measure set. This is an optional feature available in some QuickBooks versions. We have covered this in other posts and will not be covering units of measure today.
Note that there is a Purchase Information side and a Sales Information side. QuickBooks will know to use the information from the Purchase Information section in transactions like bills and checks. It will also know to use the information from the Sales Information section in transactions like invoices and sales orders.
Note the three arrows. These point to the three different accounts needed to properly setup an inventory type item.
The COGS Account will record the expense when the item is sold. The Income Account will show the sales amount when the item is sold. The Inventory Asset account will show the increase when an item is purchased.
The accounts are affected like this:
- When the item is purchased, the Asset Account, Inventory Asset is increased. This reflects the fact that the company has exchanged one asset, cash, for another, inventory on hand.
- When the item is sold, the Income account is increased. This records the fact that the company’s sales have increased by the amount of that one sale.
- Also when the item is sold, QuickBooks creates a transaction in the background. This transaction increases the COGS account to reflect the expense of the item that was sold. That transaction increases expense and decreases the Inventory Asset account, reflecting the fact that less inventory is now on hand