Inventory assets and Cost of Goods Sold tracking

Understand how QuickBooks handles inventory assets, average cost, and Cost of Goods Sold (COGS) to effectively manage your inventory.

Overview

When you track inventory, QuickBooks automatically creates specific accounts to manage the value of your items and the expense of selling them. Understanding how these accounts interact helps ensure your financial reports are accurate.

Inventory Accounts

When you set up your first inventory item, QuickBooks adds two default accounts to your chart of accounts. You can use these or set up your own subaccounts.

• 12100 - Inventory Asset: Tracks the value of inventory you own (Other Current Asset).
• 50000 - Cost of Goods Sold (COGS): Tracks the direct cost of producing the goods you sell.

Note: If these account numbers are already in use, QuickBooks assigns the next available number. Each inventory item also requires an income account.

Inventory Assets

The Inventory Asset account tracks the current value of the products you have in stock.

• When you buy inventory: QuickBooks debits the Inventory Asset account and credits your bank, credit card, or Accounts Payable (A/P) account.
• Why it's an asset: Inventory is considered an asset because it holds value that can be sold for future benefit. The expense is recorded only when the income is earned.
• Reporting: Use the Inventory Valuation Summary or Detail reports to track inventory purchases.

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a company.

• When COGS is affected: COGS is debited only when you sell inventory items on invoices or sales receipts. At the same time, the Inventory Asset account is credited.
• Selling inventory you don't have: If you sell an item that is out of stock, QuickBooks adjusts the Inventory Asset and COGS accounts based on the next purchase (bill, check, or credit card charge).
• Calculation: The amount recorded for both the Inventory Asset credit and the COGS debit is calculated as: Number of Items Sold x Average Cost of Item.

Average Cost method

QuickBooks uses the weighted average cost to determine the value of your inventory and the amount debited to COGS upon sale.

Formula: Average Cost = Total Cost of Items in Inventory / Total Number of Items

Example:

1. Purchase 1: You buy 1 widget for $2.00.
   • Average Cost = $2.00
2. Purchase 2: You buy a second widget for $1.50.
   • Calculation: ($2.00 + $1.50) / 2
   • New Average Cost = $1.75
3. Sale: You sell 1 widget.
   • COGS Debit: $1.75
   • Inventory Credit: $1.75
4. Purchase 3: You buy another widget for $2.00.
   • Calculation: ($1.75 remaining value + $2.00 new cost) / 2 items
   • New Average Cost = $1.88

Verify average cost

If you are unsure about an item's average cost, run the Inventory Valuation Summary report to see how QuickBooks calculated it.

1. Select Reports, then select Inventory.
2. Select Inventory Valuation Summary.
3. Set the Dates to All.
4. Double-click the item in question to view details.