Rustler’s Quickbooks Tips

Occasionally you pay for an order of inventory items ahead of time and when the shipment arrives there are missing items that will not be shipped at all.  When you paid for the purchase a couple of things happened.  You told QB to increase the inventory asset account by the amount of the purchase, and you increased the quantity on hand for everything you thought you were getting.  Since you will not be getting some of the items, there is a credit with the vendor.

But there is more than a credit memo to deal with, when you paid for the items you told QB you receivied them so they were put in inventory.  Quantity on hand increased as did the inventory asset account.

Since you didn’t get them, they need to be backed out of inventory asset and the quantity on hand needs to be backed out too.

Use the icon receive inventory with bill, select the vendor, mark it as a credit, enter the item(s) not received, the quantity and the cost, click save.

This takes the items out of inventory, and creates a credit to the vendor.  The next time you buy from the vendor when you go to pay bills there will be a credit sitting there waiting to be applied if you want to.

Sometimes the cost basis of inventory needs to be increased.  The most common reasons are for businesses who hold what is considered an asset for resale, autos, houses, etc.

Let’s use a house as an example.  The cost to buy the house is its cost basis. But then you need to do some repairs and pay taxes, those are also costs that need to be tracked and added to the base cost of the house being held for sale.

Set up a clearing expense account and pay the bills using that expense account.  Then write down the total in the account and bring up inventory adjust.

Set the adjustment account to the  clearing account you used to pay the bills, mark the adjustment as a value adjustment.  Scroll down and find the house.  Leave the quantity the same and change the total.  Add the amount you wrote down to the total value that QB shows and enter that new total in the new total column.

QB will take the amount out of the clearing expense account  and add it to the cost basis of the house. When you are done the clearing expense account should have a zero balance, check it.

I am not in any way familiar with this process, but Charlie is the resident expert. He has a how to, nice write up Charlie - well done, in his blog. Click the link (opens a new window)
How to use excel

Sometimes you use inventory in the running of the business, you consume it.

Use inventory adjust, select the appropriate expense account as the adjusting account and lower the number of the item on hand.  That will send the cost of the item used to the expense account.

And don’t forget that when you use the item in the business you owe “use tax” on that item to the state.  There is an entry here on how to track use tax if you need it.

Sometimes when you make something there is raw material that is used up, but is wasted so the number of items made is not what you thought.  In QB you design a BOM that is cut and dried, you tell QB to build 5 and it does, but if in the actual building process you actually got 4, there is a problem.

You need to bring up inventory adjust, set the adjusting account to the spoilage COGS account, and mark it as a value adjustment.  Write down the present value of the 5 assemblies, then change the count to 4, and enter the old value that you wrote down as the new total value.  Then QB will recalculate the cost of the 4 assemblies you actually made.  The items in the build that were taken out of inventory will not be effected - they  are already used up.

Negative inventory seems to be something all programs allow. Even the POS system I am demoing (not QB’s) allows you to sell something you don’t have. For the life of me I can not understand why you would allow that, but it is what it is.

When you sell inventory into a negative balance on hand what happens behind the scenes in QB?

Well everything seems to work normally:

- the average cost of the item sold is deducted from the value in inventory asset
- that average cost is sent to COGS
- and the quantity on hand is reduced.

So what is the problem? Pretty simple. That value of the item sold was never there, but it was removed from an asset account.

Then when you buy more of the item QB does some behind the scenes adjusting. The purchase is posted to:

- inventory asset
- the item cost is recalculated
- and a payable is entered.

Then QB looks back and sees the negative sales entry and compares the cost it used to the new cost based upon the purchase. And if the cost is different, it reduces inventory asset by the amount of the difference and increases COGS by the same amount. That is why you will see an entry called Bill in the COGS listing, it is the adjustment QB makes for negative sales.

OF course if the new cost is less than before, then the adjusting entries are opposite, COGS is reduced and inventory asset is increased.

This all works fine and things balance out - unless this happens over the end of year. That will cause you problems, so don’t sell anything to a negative if you cannot get it back in stock before the year ends.

Inbound shipping should be included in the cost of items held for resale.

When shipping is part of the purchase invoice, I “guesstimate” the shipping per item and change the total for each item on the invoice, when you do that QB will recalculate the per item price.  As long as the total on the bill in QB equals the total on the invoice (bill) you receive all is good.

When shipping charges come in separately it gets a little more involved.  Pay the shipping and use a clearing expense account.  Then bring up inventory adjust, mark it as a value adjustment, set the adjusting account to the clearing expense account, find the item(s) and increase the item value by the amount of shipping expense, do not change the quantity on hand.  That takes the amount of shipping out of the clearing expense account and adds it to the items in inventory and QB recalculates the average cost.  The clearing expense account should be zero balance when you are done, check it and if it is not, find the error.

Don’t do it.

When you change a non-inventory part to inventory QB goes back in history and changes every transaction that used that part. It is as if the part was always an inventory part. And that means that prior years financial reports also change, since this changes inventory asset totals and COGS.

Keep in mind that COGS is handled differently for the two parts, when you bought and sold the non-inventory part the actual cost was expensed (hopefully to COGS) immediately, when it becomes an inventory part the cost to purchase is averaged and that average cost is what is sent to COGS. In addition the cost of an inventory item is held in inventory asset, so your inventory value changes.

I will admit that sometimes is works just fine, but sometimes it doesn’t, and since I don’t know the ins and outs of your transactions, I think it is better to play it safe, since once the change is made - it cannot be undone.

Instead of changing the item, rename it (add the -old suffix to the part name), mark it as being inactive, and then create a new inventory part with the old name and use that item from that day forward.

Occasionally inventory is obsolete, spoiled or damaged somehow and you need to get rid of it.

One way is to set up an account called something like “spoilage/obsolete” as a sub account of COGS. Then use inventory adjust, select the account “spoilage/obsolete” as the adjusting account and then lower the quantity on hand of the item that are no good anymore.

This assumes of course that you really do throw the items away.

And you thought the only income you needed to record came from sales huh? A donation is an income event too.

I don’t deal with non-profit accounting and from what I understand they have some different rules to go by so if you are a non-profit this may not apply.

A donation is an income, even if what is donated is equipment, it has to be recorded at the fair market value on the date of donation.

You need to create a seperate income account, called something like “Donation Income”, or just use the “Other Income” account and enter something in the memo block to remind you about it.

Then the value of the donation is debited to an asset account (cash, equipment, inventory, what ever) and credited to the “Donation or Other Income” account.

To get this done, bring up inventory adjust, mark it as a value adjustment, select the donation income account as the adjusting account, increase the quantity of the item, and increase the total value of the item. That gives the item a cost and the income account shows that same cost as income to the business.

This same holds true for rebates from credit cards, that is also an income.

A donation is free and clear of ownership, the person donating has no claim to business equity. If the donation is tied to a claim on ownership of some part of the business then you need to set up an equity account for the person donating (what they are really doing is investing not donating) and credit that equity account instead of income.

So you sell something you don’t have- what happens?

Inventory for the item goes negative.

COGS is correct, QB takes the average cost of the item and multiplies it to determine total cost for the sale and posts it to COGS.

Inventory asset is correct, the total cost of the sale is deducted from inventory asset.

Sales income goes up by the amount of the sale.

So what is the problem, everything is right. Well not exactly, there is a cost being booked that you have not paid for, that is one problem. And another is that the cost being booked is the old cost, you may buy stock at the same old cost then again you may not, and of course you have a negative quantity for the item in stock. And Inventory Asset went down by an amount that was not there.

And then you buy some, buy some at a higher cost.

QB makes some correcting entries for you.

Inventory is updated to reflect the purchase quantity less what was sold that you didn’t have.

Inventory Asset is increased by the amount of the purchase.

The difference between the cost that was booked when you sold stuff you didn’t have and the new cost is posted to:

COGS as a bill, yes a bill, so if you are seeing bills show up in COGS that is most likely the reason. The problem is figuring out why the bill is there. The bill is posted as of the date of the bill, and the original cost is posted as of the date of the sale, There is no way to correlate the two in QB.

And Inventory asset shows a bill for the difference in cost amount as a negative, just like it did when the cost of the sale was deducted at the time of sale. Same date problems exist and the same lack of correlation as with the posting in COGS.

Sorry unless you ponied up the money for Accountant, Manufacturing and Wholesale, Retail, and Enterprise editions, you are just out of luck.  Evidently the designers of QB think no one else has back-orders.

Now someone explain to me why an accountant edition would need to be able to track back-orders? What they run out of pencils?

Ok Ok I am being facetious, they need it cause in theory they audit the other high dollar versions.

In my view this is a major problem with QB, and it causes major problems by not having that ability in the versions used by most of us.  Not having a way to track back-orders means you can sell something you do not have - that is a problem!

QB Premier and higher allow inventory assemblies. An assembly is nothing more than a group of inventory items that when put together make something you sell. QB will allow you to build an assembly and then include that assembly in another assembly - something I think you should stay away from if at all possible.

QB does not auto-build assemblies (it should IMO, it’s competitors do, but many are against it and that is a whole ‘nother discussion as they say), so you have to build the assembly before selling it. Well you should build it before selling it, QB will sell it even if there are zero built, QB will warn you that there are not enough, but it will still sell it.

Selling something you do not have will cause problems down the road, try to avoid it if at all possible.

When you create an assembly, there is a list spot to select the items that make up the assembly, you enter each one and tell QB how many of that item to use when it builds one assembly. If you leave the quantity blank or enter a zero, QB will still use a quantity of one. The list of items in the build also shows the cost of the items, and that cost is what is totaled to determine the overall cost of the assembly.

But, what QB does is take the cost from the cost block on the item screen that is below the description block and display it in the build list. Sounds good huh? The problem is, that is misleading, the cost in that block most often reflects your most recent cost to buy the item, that recent cost is not necessarily the average cost. And guess what? QB uses the average cost when building an item, and when expensing it to COGS when sold.

The list of items in the build is usually referred to as the BOM (Bill of Materials) and QB does not have a way to print it, other than printing the assembly item itself which includes a lot of financial data you may or may not want on the print out.

As I said QB leaves it to you to remember to build the assembly before selling it. And if you try to build it, and one or more of the items in the BOM have an insufficient quantity for the number you wish to build, QB will not build that number. It will tell you there is not enough of an item to complete the build, but it will not tell you which item or items. Well in a way it does, when the build assembly screen is up, the BOM is listed with available quantities for each item, you can scroll down the list and look for a balance that is below the number you wish to build. You would think in this day of computers that QB would highlight the item for you, but it doesn’t.

Purchase orders, sales orders, and pending invoices are non-posting records. They do nothing to the “books” in other words. You will not see them in any financial statements.

In preferences you can have Sales Orders reduce inventory levels if you wish, there is a toggle there to do it, but that is the only exception. All that does is reserve the inventory on the sales order, makes it appear, key word is “appear” as though the inventory is not there. Though it appears as though it is sold it is not, not until the sales order is turned into an invoice.

The problem with doing it that way is that if you do a physical inventory and compare what is on hand to what the item list says, there will be a difference because the sales orders have reduced inventory, well reduced what appears to be on hand.

Inventory adjustments are a fact of life, things disappear, get broken, become demos, get used in the business, become obsolete, etc.  When that happens you have to adjust the number on hand.  When you make the adjustment QB has to know what “Adjusting Account” to use.  There is no hard and fast rule, but common sense should prevail.

When you make the adjustment QB takes the value of the item(s) out of inventory asset and puts that value in the adjusting account (some kind of expense) you pick.

If you use the item as a demo or in the business - Use an expense account that reflects what you are doing, promotion expense, advertising expense, operating expense, etc. And don’t forget use tax applies.

If you take the item for personal use use the owner equity drawing account. And don’t forget use tax applies.

If it just disappeared, broke, or became obsolete, then I would suggest a COGS-Spoilage account which reports on the Other line on IRS forms where you calculate the cost of inventory.

If you ship items to your customers you undoubtedly use shipping boxes and materials (packing, tape, labels, etc).  how you account for them can be a headache.  I carry them in inventory as an “Other Asset” and set the cost account to shipping expense, the income account to sales and a sale price of zero.

The tape, packing material, labels, stuff like that I treat the same way I suggest accounting for bulk items (see the TAG Bulk Item Acct’ng).  You can also use the same system for the boxes.

Short of putting the items on the invoice as packing materials or something (which looks kind of flaky IMO) there just is not any other way to do it that I can see.

Because this blog won’t let me tag a page, it only tags an entry, and I can’t see duplicating things, click here
Depreciation parts 1 and 2

This is one way to do the core thing, there are probably other ways to do it. I’ve assumed only one item that has a core charge, obviously if you have more than one item, the core charge and core item will have to be specific, you will have more than one of each in other words.
(i.e. core-alternator, core-starter, core-injector)

A core charge is when you are required to get the used item back so it can be rebuilt. Like a starter motor for a car, you buy a new one, but it is actually a rebuilt core you are buying, so the shop charges you a core charge, if you bring back the core, you get that charge refunded.

So you need to charge for the core at the time of sale, and the customer will do one of three things:

Condition 1. Pay the core charge at the time of purchase

Condition 2. Have the core to turn in at the time of purchase

Condition 3. Bring in the core some time after the purchase.

Obviously we need a charge item, an income item, an inventory item, and an account to track core charges and refunds.

Set up an income account called core.

Set up an other charge item called core-charge and select the income account core, enter the amount of the core charge.

Set up an inventory item called core-item select the income account core and set the price as the same as the core charge.

Condition 1. Create the invoice, enter the part being purchased and then the core charge - receive payment.

Condition 2. Create the invoice, enter the part being purchased, and then the core charge, then enter the core-item and a quantity of -1 (negative one), the core-item should have the same price as the core charge. (if you get a warning about not having enough to sell, ignore it)

Condition 3. Condition one has already happened (the core charge was paid in advance). Bring up Create Credit Memo/Refunds, select the customer, then enter the item core-item, a quantity of one (positive one for this action), and the amount, click save and close. QB asks if you want to refund or carry a credit. If you refund, the screen comes up, Select the account and type of refund, click close.

Behind the scenes:
When you charge for a core, the amount goes to the income account for cores. When the core is returned, the inventory item “core-item” increases the amount on hand, the negative amount is sent to the core income account and zeros out the core charge that was posted there. If a refund is issued, the refund is credited to the core income account, again zeroing out the amount received. Since the inventory item “core-item” has no cost, there is a zero entry in COGS.

Inventory increases the number of cores on hand even though you entered a negative one on the invoice (I have no idea don’t ask), so you can see how many cores you have and send them off to be rebuilt when you have enough.

So let’s say that you sell bobcats (the machine not the animal) and have them in inventory. And the business is thriving and you are going to expand so you want to take one bobcat out of inventory and make it a fixed asset because you are going to start using it to clear some land.

Now you would think that QB would have thought this one through, but …

Logically you should be able to use inventory adjust, and move the item to the fixed asset account, and you can. The problem is that it does not make an entry in the fixed asset list, the value of the item just sits in the fixed asset account.

Since you really need to have it in the fixed asset list that poses a problem.

The only way I can figure to do it is to use the inventory adjust and as the adjusting account select “cash”, lower the quantity on hand by one. That takes the cost out of Inventory asset, lowers the number on hand, and increases cash by the cost of the bobcat.

Then go to “Enter bills and expenses” and on the expense tab under account select the fixed asset account. QB will ask you if you want to set up a fixed asset, do that and pay the bill with cash. In the memo block of all transactions I would say something about this being an internal transaction and why.

And don’t forget to include this transaction in your calculations for use tax.

When you create an inventory item and tell QB how many are on hand, and the total value QB creates what is called an opening balance entry in the inventory asset account and the Opening Balance Equity account. You added value to the company.

If you made a mistake and entered an inventory item as having an opening balance and later the bill comes in, that poses a problem. If you pay the bill you are either doubling inventory, or increasing an expense that shouldn’t be.

Right click on the inventory item in the items list, select Quick Report and set the date range to all. The first entry will be the opening balance entry, double click on it and then use the menu Edit>Delete to get rid of it. Then enter the inventory purchase as you normally would.

Have I confused you? ROFL - yea well.

In QB and on all the forums, everyone talks about inventory as being something you have for sale, or something you use to create something for sale. And I fell into this habit too, …….. my bad.

What about that other stuff you have that you want to track, what we think of as equipment inventory? Desks, computers, copiers, filing cabinets, all that stuff. It is inventory to the business, even if you expense it off using the Section 179 deduction, it still exists in the business and you want to make sure you still have it.

To do that you have know you have it, or have 5 filing cabinets, 4 desk lamps, etc etc.

Unless you just like following obscure uses for QB, or have a need to track this stuff, go read something else cause this in going to get real complicated.

When you set up an inventory item you generally pick the COGS and sales accounts and leave the asset account alone - it defaults to inventory asset. BUT, if you change that asset account to something like Office Equipment (an Other Asset account) then the cost of the inventory item you are creating or buying will go to that account and the number on hand will reflect how many you bought. (You do have to keep a COGS and an income account on the item screen, but since you are not going to sell it, it makes no difference.)

In the item list you should segregate these items away from the inventory you sell. Make a blank line, a divider and label it non-sale items or equipment or something. Then make the desk item a sub item of that divider.

If you do it this way then the shortcut I talked about in the Misc Category under Section 179 Deduction wouldn’t be used. But interestingly enough, when you have a desk with a value of say $498.00 as an inventory item (in the Office Equipment asset account), and you do a journal entry to expense $498.00 off to the Section 179 expense, QB **only** removes the value from the asset account, the quantity on hand is still there.

So now you have a piece of equipment in “Equipment” inventory that you can track, the cost is easily found, and if it is expensed to the Section 179 Deduction that is also easily found. If you need to do the actual depreciation for an item of equipment then you can - the cost is readily available.

The other way to accomplish the same thing is to use the shortcut Section 179 deduction that I explained. That expenses the item off the books right away. Then create an inventory item with zero cost and the quantity of the item on hand. With zero cost it makes no difference what asset account you use, but you should use the Office Equipment asset account to keep things logical. I don’t particularly care for this way of doing it, because the cost is just too hard to track. When I buy the item and put it in the Equipment Asset account the cost is there in that account, and then the entry to move that cost to the Section 179 deduction is also there.

And hopefully at some point your business will make too much money to qualify for the Section 179 deduction, then you will have to cope with depreciation on the desks, copiers, etc. And if the cost is in the Equipment asset account, that makes it easier.

Do not use a non-inventory item in an assembly build, it does not work the way QB help says it will. What will happen is that the cost you enter in the cost block on the non-inventory item will go to COGS immediately when the build is created. That is wrong the cost should be held in the cost of the build and not sent to COGS until the build is sold.

QB does not hold the value of a non-inventory item marked for resale as it should, so when you use it in a build there is no value to add to the cost of the build. So what QB does is take the amount you entered in the cost block of the non-inventory item and send it to COGS immediately.

Since you had an expense when you bought the non-inventory item, using the non-inventory item in a build, adds that expense again in COGS. Not only is doubling expenses, but COGS should not have an entry until the assembly is sold.

Correction

Charlie Russell said it worked for him (see the comments for this entry) so I went back experimenting. IF, the key word is IF, you or QB enters the cost of the non-inventory item in the cost block below the description block before using it in an assembly (building the assembly), then it will work. For some reason my version of QB will not make that entry when I buy a non-inventory item.

What I did notice though, was the assembly build is keeping average cost based upon the  previous builds too, so if the earlier builds used the non-inv item without the cost block filled in, the average cost is wrong.  When the cost block of the non-inv item is filled in it works as Charlie says and the average computed cost starts increasing.

That Item list sure gets hard to read and find one thing sometimes, so I created separators for the assembly portion of my item list (I almost always sell assemblies). See how nice and easy it is to read, the items are sorted together. When you have the list open you can drag and drop the items anywhere you want - within the type at least.

I created an assembly item since I am sorting assemblies, (use an inventory item if you are sorting inventory), for the name I gave it one hyphen (-) and selected an income account, then move it to where I need it. Each one has to be a seperate name though, so the next one has two hyphens (–), and so on. It does use up the name list but I have room, and if it come to push or shove I can always merge them all and mark it inactive.

Odd but QB does not require a build list to create an assembly item.

When you issue a build for an item, you will not see a change in inventory asset on the balance sheet.

What happens is that QB takes the value of each item that is used to make the build out of the inventory asset account, adds them all up, and puts that value back in the inventory asset account as the new item that you built.

A zero sum entry, the value taken out equals the value added.

QB has a limit on names, 14500, seems like  a lot until you have been in business awhile.  QB will not let you delete an item if it was used in any transaction for the life of the file.

Marking the item inactive will get it off the screen but it is still there taking space and “reserving” the name, a name once used cannot be used again.

But you can merge names, which of course merges the items and all transactions for them, so be careful.   Decide what name you want to stock it under, then bring up the other items and change the name.  QB will ask if you want to merge the items, say yes.

And while we are on the subject of names, the names that you buy things under also count, so if you start using vendor names for each and every gas station you use while traveling, you will hit the limit fast.  When ever possible use a generic name like gas, food, lodging, printing, etc. and if you want you can put the business name in the description block.

Quite often I see this in the QB forum, a question about bulk inventory items and how to track them for COGS. Mostly from restaurants, but also from auto service where they buy bulk oil and shop supplies.

It is pretty hard to track how much flour (as an example) you use on a day to day basis, and yet flour is an inventory item and its’ cost should be tracked.

What I suggest is to order and stock your flour and stock it in the container it comes in. In other words if you order 10-pound bags, then stock it by the bag.

When you take a bag off the shelf to use it in the kitchen, use inventory adjust and set the adjusting account to COGS, then lower the quantity of the items taken off the shelf and click ok.

It is not a 100% day by day accurate way to track bulk items but over time it works out just fine since the only reason you would take a bag off the shelf is because the old bag is used up.

Use your imagination and replace flour with what ever you are buying in bulk, booze, salt, grease, oil, solvent, what ever.

IF, notice the word if - very important, if you have some inventory items on hand when you go to create an inventory item for the first time in QB you should know (before you create the item) the number on hand and the total value.

When you create the inventory item for the first time, enter the number on hand and the total value as well as all the other things.

When you do that QB will do all the behind the scenes accounting for you. The cost of the item will be determined and the total cost (value) will be posted to two accounts: inventory asset and opening balance equity.

When you have finished entering all inventory that is on hand (creating new items with a quantity on hand) then go the reports menu and print a balance sheet - that will show you the amount in opening balance equity.

In your chart of accounts there should be an owners equity account. If you have more than one owner there should be an equity account for each owner (you may have to create them).

Use the menu item Company>make journal entries - that brings up a screen. First line select the opening balance equity account and as a debit enter the number on the balance sheet, second line select owner equity and enter that number as a credit. That moves the number from opening balance equity to owner equity.

If you have more than one owner you will have to make more than one entry and enter some portion of the opening balance equity to each owner.

I have an entry on equity accounts in the Misc category too.

If you are having a problem with inventory and QB is telling you that you do not have enough to sell or enough to build an assembly, and yet when you look at the item list there it is - check the dates of the item receipts.  Right click on the item and select quick report and set the date range to all.

If there is a date in the future that is the problem. For some reason QB will display the added quantities of an item even if it was received in the future (the wrong date is used by accident when receiving the item) but QB will not allow you to use the item until that date arrives.

If you find one like that double click on it and change the date to what it should have been.

There are a lot of variations for dealing with work in progress and there is no way cover all kinds. One common scenarios is that you order raw material of some kind and you send it to someone else to make what you sell. So the cost of what you sell is the combination of the cost of the raw material and the bill from the other company who turned your raw material into a product.

I buy the raw material as an inventory item. Then when I have to ship it out to a business to be turned into something salable, I use inventory adjust to move the raw material I am sending out to an other current asset account I set up called WIP. That adjustment takes the raw material out of inventory and holds that value in the WIP account.

When I get the bill for making something from my raw material, I receive the inventory just as you would normally. That gives the item a cost.

Then look at the WIP account and write down the balance.

Then use inventory adjust, set the adjusting account to the WIP account, and mark the adjustment as a value adjustment. Find the item in the list, and add the amount from the WIP account to the total value of the item. DO NOT change the number of items on hand.

When you click save the value of the raw material that was in the WIP account will be added to the value of the items that were made and a new cost per item will be calculated. The WIP account will have a zero balance.

You can use variations of this process to cover just about any process where more than one transaction is involved in determining cost.

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Answering a question on the QB forum led me to another way to accomplish the same thing.Create an other asset account called something like WIP, and then create a non-inventory item called something like “WIP-purchases” and point it to the WIP asset account.  When you buy things use this item, and in the description block enter what it is you bought.  As soon as the transaction is saved the cost of the “WIP-purchases” item is sent to the WIP asset account since the cost of all non-inventory items (even if they are marked for resale) are posted to the account they point to.

Sometimes you have to either pre-pay for items ordered, or pre-pay a deposit on items ordered.

To order and pay for the items
1. Create a purchase order for the items.
2. Create a current asset account, and name the account “Prepaid inventory” or a similar name.
3. Enter charges for the items by:
a. Entering a credit card charge. When QuickBooks indicates that you have an open purchase order for the vendor, do not select the purchase order.
b. On the Expenses tab of the check or credit card charge, click the Account field. Choose the other current asset account that you created. Then, save the check or credit card transaction.

That puts the amount of the pre-payment or deposit in the “other current asset” account you created.

To receive the items
Find the check or credit card charge for the transaction.

1. On the Expenses tab, select the line that contains your other current asset account.
2. Go to the Edit menu and click Delete Line.
3. Click the Items tab.
a. Click Select PO.
b. Click the purchase order that contains the items you paid for and then click OK.

If necessary, record additional expenses (such as shipping) on a new credit card charge or check. Don’t add additional expenses to the existing credit card charge or check.

Save the transaction.

That takes the amount in the pre-paid other current asset account and transfers it to the purchase of inventory.

Trade discounts. The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Do not show the discount amount separately as an item in gross income.
IRS Pub 334 Chapter 6 COGS, page 28

IRS Regs. Sec. 1.471-3(b) requires trade or other discounts to be treated as reductions in the purchase price of the inventory to which they relate, rather than as gross income.

So the end result of all that legaleeze is that a discount on what you buy for inventory is not income. The cost of the items purchased has to be reduced by the amount of the discount.

Occasionally you have to pay for the item, and then also pay for freight or import taxes or something else that is really part of the cost of the item.

You can use a clearing account, basically an account that has no use except to hold a value until you use it.

When you buy the item, the cost is added to inventory.

When you pay for the added expense use the clearing account to record the expense.  Then find the balance in the clearing account and write it down.  Bring up inventory adjust and mark it as a value adjustment. Find the item  and in the value column enter the new total value (the old value plus the amount from the clearing account. Use the clearing account as the adjusting account when making the adjustment.

That will remove the value from the clearing account and add it to the cost of the item.  Do not increase the number of items on hand when you do this.

I have two inventory locations and this is the way I handle it (there are probably other ways to do it too).

For each item I create a sub item which is titled to reflect the second location as an example:

Parent Item: widget
Sub Item: widget-A

where the “-A” tells me it is the second location.

When I buy inventory it is (in my case) received at my location so I bring it on the books under the parent item.

When I move some of the inventory to the second location I use the Inventory Adjust and reduce the inventory quantity in the parent and increase the sub item by the same amount. This moves the quantity from one location to another and the expense of the adjustment zeros out since the reduction in one inventory item is offset by the increase of the other. I use the spoilage expense account for the adjustment, though since it zeros out any expense account could be used. The inventory quantities at each location for each item are easy to see in the item list.

When an item sells I use the widget item or the widget-A item depending on whether it sold from my location or the second location.

On the inventory (and the assembly) item screen there is a block titled cost just below the description block. The QB help for this block says something about entering overhead and other markup costs. Wrong! It just does not work that way. Any cost you enter there will show up in reports, but it will not be used when COGS is posted.

You can prove that by (in a test file) sell the item, bring up a profit and loss statement and look at the total in COGS, then bring up the item screen and enter something more than the average cost. Sell the item again and you will see that the COGS account increases by the cost of the item or assembly, NOT the amount you entered in the cost block.

One thing that the QB help file does not make clear is how it handles the cost of inventory and non-inventory items.

When you buy an inventory item, the cost is added to the total in the account called “inventory asset.”  QB also calculates the average cost of the item based upon the number of items on hand, their cost,  and the new purchase.  One thing to realize is that QB averages cost based upon the life of the file, NOT this year as it should (according to the IRS requirement for perpetual inventory).

When you sell an inventory item, QB takes the total cost of the items sold out of “inventory asset” and sends that cost to the COGS account.

So far all is good.  But QB says you can mark a non-inventory item for resale, when you do that it opens a screen that looks just like the inventory item screen.  You would think, since the screens are the same, that the same thing would happen …. the item cost would be held until it is sold.  NOPE!

When you buy a non-inventory item the cost of the whole purchase is immediately sent to COGS (assuming that is the expense account you selected).  So if you are selling all of what you bought, that is not a problem.  But if you got a deal on a bulk purchase, the whole purchase is expensed - that is just wrong!

If you sell the whole purchase before the year is over, that works just fine.  But if you have some on hand at years end, their cost is still in the expense account - and it should not be.

On top of that, QB will not, does not, carry a balance on hand for non-inventory items even when marked as being for resale.