How does QBO determine the Initial Cost on inventory

I've got you covered, Mariko.

I have information regarding the initial cost on inventory in QuickBooks Online (QBO).

To begin with, QuickBooks uses the weighted average cost to determine the value of your inventory and the cost of goods sold (COGS) when you sell inventory. The average cost is calculated by adding up the cost of all items in inventory and then dividing that total by the number of items. For further details, you can refer to this article: Understand inventory assets and cost of goods sold tracking

On the other hand, QBO will not generate the initial rate/cost based on the expense purchase amount. If you haven't manually entered the cost for certain products, they will still have rates in your Purchases by Product/Service Detail report as QBO will assume a rate for these items based on the transactions created, even if no cost was manually entered.

I'll also add this article to help you get the most out of your financial reports: Customize reports

In case you have any follow-up questions regarding the initial cost on inventory or anything else related to QuickBooks, feel free to ask me. I'm always here to help you, Mariko. Take care!

Thank you for the clarification @Clark_B!

Good to know that the cost will be generated in the Purchases by Product/Services Detail report even if I don't manually enter the initial rate/cost. 

Please correct me if I'm wrong, but I thought QBO used FIFO  to determine the value of inventory and COGS, not weighted average. Article: What is FIFO and how is it used for inventory cost accounting?

Hello there, @marikosakoda. Allow me to clarify about the costing method in QuickBooks Online (QBO).

The initial cost and quantity of the item are determined by the purchased amount. Entering this information during the initial setup of the item will result in an incorrect value in the inventory asset account.

Yes, you're right, QBO uses FIFO (First In, First Out) to calculate the value of inventory and will adjust your assets and Cost of Goods Sold (COGS) accordingly whenever sales of inventory items are entered. The weighted average is only applicable to QuickBooks Desktop (QBDT).

• Use reports to see your sales and inventory status
• Impacts of inventory tracking on the Balance Sheet and Profit & Loss reports
• What is FIFO and how is it used for inventory cost accounting?

Please know that you can always return here to the Community, if you have more questions related to inventory in QBO. I'm here to help you out. Have a great day.

Thank you for clearing that up @ErwinQ!

Just to make sure I understand initial costs:

If I start with 0 quantity on hand, do not enter the initial cost or quantity. The purchase expense will take care of this.

If I start with say 2 quantity on hand, is it correct enter the initial cost and quantity?