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PVOLLC
Level 4

Does QBO class feature obviate the need for COGS?

If you can use the "class" feature to assign every income and expense to a particular part of your operation, why use COGS?

COGS has a slippery definition to be sure, but what it seems to boil down to is a cost that is proportionate in a direct way to your units of production. If you sell X number of units, then you will have to pay for a certain, determinable percentage of that unit on something to produce it.

As I understand it, it doesn't matter for tax purposes whether its a COGS or a direct expense; the two classes are not taxed differently (but I have no idea to be honest).

I've been running my business for ten years with a pretty competent accountant and I've never used COGS until I started using QBO last year.

I'm told COGS is just a precise way of determining your gross profit for a particular product, service, etc.

So if you can just assign all the expenses that you can directly (and proportionately) associate with that product, service, etc. with a class, why use COGS?
Solved
Best answer January 07, 2020

Best Answers
ChristieAnn
QuickBooks Team

Does QBO class feature obviate the need for COGS?

Hi there, 

 

Yes, you're correct, it will show the same thing in the report if you set up a class on every item.

 

However, the two have a different functions in QuickBooks as mentioned by my colleague above.

 

Please know that you're always welcome to post if you have any other concerns. Wishing you and your business continued success.

View solution in original post

4 Comments 4
Michelle_b
QuickBooks Team

Does QBO class feature obviate the need for COGS?

Hi, @PVOLLC

 

Let me discuss the difference between COGS and Class tracking in QuickBooks Online.

 

  • Class tracking use classes to track your transactions by departments, product lines, or any other meaningful segments in your business.  Note: Class tracking is only available in QuickBooks Plus Version. 
  • Costs of Goods SoldCOGS) tracks all of the costs associated with the items you sell, which allows you to calculate gross profits accurately. COGS accounts also give the total underlying costs on your Chart of Accounts (COA). 

Normally, inventory COGS is only affected when you sell inventory items on invoices or sales receipts. When you sell an inventory item, you'll see in the Transaction Report that the Inventory/COGS transactions is credits the Inventory Asset account and debits the COGS accounts.

 

However, if you sell inventory that you don't have, you'll need 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. The average cost is the sum of the cost of all of the items in inventory divided by the number of items. 

 

For future reference, you can check this article on how to tag a class to a transactions and change the tag in a customer transaction: Track your transactions by class

 

Keep me posted if there's anything else you need. I'm just a post away. Have a good one.

PVOLLC
Level 4

Does QBO class feature obviate the need for COGS?

However, if you go to Reports and run "Profit and Loss" by class, it seems to do the exact same thing as your description of COGS with all income and expense to which you assigned a class.

ChristieAnn
QuickBooks Team

Does QBO class feature obviate the need for COGS?

Hi there, 

 

Yes, you're correct, it will show the same thing in the report if you set up a class on every item.

 

However, the two have a different functions in QuickBooks as mentioned by my colleague above.

 

Please know that you're always welcome to post if you have any other concerns. Wishing you and your business continued success.

View solution in original post

PVOLLC
Level 4

Does QBO class feature obviate the need for COGS?

Ah great point. QBO uses the COGS category to do its gross profit calculation.

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