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.
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 are 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.
When you purchase 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 (1) it is an asset that you can sell for future benefit and (2) 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 affected only 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 will 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 subsequent 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.
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 (Reports > Inventory > Inventory Valuation Summary). Set the dates to All. QuickZoom (double-click) the item in question. The Inventory Valuation Detail report shows you exactly how QuickBooks derived the item's average cost.