To successfully track inventory, you need to understand how QuickBooks handles inventory assets, average cost and Cost of Goods Sold (COGS). Learn how to compute for the average cost and know which report will help with inventory management in this article.
Inventory Accounts
When you set up your first inventory item in your Inventory List, QuickBooks automatically adds two accounts to your company file's Chart of Accounts:
- 12100 - Inventory Asset - Other Current Asset
- 50000 - Cost of Goods Sold (COGS) - Cost of Goods Sold
In addition, each inventory item requires an income account. You're not required to use either of the automatically set up accounts. You can set up your own accounts or subaccounts.
Note: If either of these account numbers is already in use, QuickBooks will assign the next available number to the new accounts.
Inventory Assets
When you buy an inventory item, your Bill, Check or Credit Card Charge will debit the Item's Inventory Asset account and credit your A/P, bank or credit card account. It is not debited to an expense account because it is an asset that you can sell for future benefit and you record the expense to match the income.
The best way to track your inventory purchases is to run the Inventory Valuation Summary/Detail reports for all dates.
Cost of Goods Sold
Normally, inventory COGS is only affected when you sell inventory items on invoices or sales receipts. When you sell an inventory item, run the Transaction Journal Report for the invoice/sales receipt and you see the Sales/Accounts Receivable transaction and you'll see the Inventory/COGS transactions which credits the Inventory Asset account and debits the COGS accounts.
However, if you sell inventory that you do not have, you can force the next bills, checks, or credit card charges to adjust the Inventory Asset account and the COGS account. The amount on each side of the Inventory/COGS transaction is: Number of Items Sold x Average Cost of Item.
Average Cost
QuickBooks uses the weighted average cost to determine the value of your inventory and the amount debited to COGS when you sell inventory. The average cost is the sum of the cost of all of the items in inventory divided by the number of items.
- You purchase a widget for $2.00. The average cost is $2.00.
- You purchase a second widget for $1.50. The average cost is now (2 + 1.5) / 2 = 1.75.
- You sell a widget. The inventory/COGS transaction debits COGS for $1.75 and credits inventory for $1.75.
- You purchase another widget for $2.00. Now your average cost is (1.75 + 2.00) / 2 = 1.88.
If you have any questions about an average cost, your best course of action is to run the Inventory Valuation Summary report. This shows you how QuickBooks got the item's average cost.
- SelectReports, then selectInventory.
- Select Inventory Valuation Summary, then set the dates to All.
- Double-click the item in question.
FAQs
In QuickBooks Online, inventory assets refer to the inventory items you have at hand and ready to sell. Let's say that you're a manufacturer that produces microphones. The number of microphones you currently have prepared and are ready to be sold would be considered inventory assets.
How do I track inventory and COGS in QuickBooks? ›
Tracking Inventory and COGS
- Hover over Sales in the left menu and choose Product and Services.
- Click Edit in the Action column for a service item.
- Click Change type at the top of the edit window.
- Select Inventory.
- Enter the necessary details for Initial quantity on hand and As of date.
- Verify other details as necessary.
In all cases, inventory is something the company will re-sell to someone else. Inventory cost is an asset until it is sold; after merchandise is sold, the cost becomes an expense, called Cost of Goods Sold (COGS). A journal entry transfers costs from the Balance Sheet to the Income Statement.
How do you account for inventory and cost of goods sold? ›
You should record the cost of goods sold as a business expense on your income statement. Under COGS, record any sold inventory. On most income statements, cost of goods sold appears beneath sales revenue and before gross profits. You can determine net income by subtracting expenses (including COGS) from revenues.
What is an example of an inventory asset? ›
Inventory assets are not sold to customers nor are they consumed by employees; they are the reusable items that your company uses to create its product or services. For example, in a construction company, inventory assets could consist of items like hammers, drills, and saws to trucks, excavators, and forklifts.
What is the difference between inventory and inventory assets? ›
Assets are typically long-term investments, while inventory is a short-term investment. Assets are typically larger and more expensive items, while inventory consists of smaller, less expensive items. Assets are typically owned by the business, while inventory is usually purchased from suppliers.
Can you have COGS without inventory? ›
COGS is not addressed in any detail in generally accepted accounting principles (GAAP), but COGS is defined as only the cost of inventory items sold during a given period. Not only do service companies have no goods to sell, but purely service companies also do not have inventories.
What is the journal entry for cost of goods sold and inventory? ›
The journal entry for cost of goods sold is a calculation of beginning inventory, plus purchases, minus ending inventory. The cost of goods sold entry records the total of all direct costs incurred during the production and/or sale of goods.
When should I use cost of goods sold in QuickBooks? ›
Understanding COGS is essential as it shows how much profit the business is making per item and where costs can be improved. To determine your gross profit margin, subtract your COGS from the sale price.
Is inventory an asset or expense? ›
Since inventory is an asset, it is reported in the asset section of your company's balance sheet. Once the item leaves your business, it is no longer part of your inventory. That change in inventory is what then gets reported as a COGS entry on your income statement.
Calculate COGS by adding the cost of inventory at the beginning of the year to purchases made throughout the year. Then, subtract the cost of inventory remaining at the end of the year. The final number will be the yearly cost of goods sold for your business.
How to calculate inventory? ›
The basic formula for calculating ending inventory is: Beginning inventory + net purchases – COGS = ending inventory. Your beginning inventory is the last period's ending inventory.
What is inventory asset? ›
Inventory assets are the finished products a company intends to sell for profit; these include materials, merchandise, and products that are either finished or unfinished. Furthermore, a company's accounting records inventory as a current asset on its balance sheet.
How is inventory asset calculated in QuickBooks? ›
QuickBooks uses the weighted average cost to determine the value of your inventory and the amount debited to COGS when you sell inventory. The average cost is the sum of the cost of all of the items in inventory divided by the number of items.
What is inventory asset vs liability? ›
Inventory is almost always an asset for accounting purposes. An asset is an item that will provide an economic benefit at some point in the future. A liability is an item that represents a financial deficit or debt.
What is inventory asset on balance sheet? ›
Inventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated.
