Question

COGS / Inventory Assets ?

Forum|Forum|3 years ago
January 13, 2023
8 replies
52 views

Hi!

I own a vintage store and currently have about $150k in 'inventory assets' aka vintage stuff in my store. However, I'm realizing these assets are not documented anywhere in Quickbooks, which affects my balance sheet.

I think my chart of accounts are off.

I don't use quickbooks to manage my inventory. I use my own website. When I make purchases with my credit card, I categorize those purchases as COGS, and when they sell, the deposits from my website are categorize as Sales. Therefore, the 'COGS' line on my P&L is not actually cost of goods sold within that period, it's just the cost of inventory. For instance, let's say in 2023 I don't buy any new inventory, and I sell everything in my shop. My P&L will say $150k in sales and $0 in COGS, which isn't technically correct - those goods sold did in fact cost money.

My questions are:
1. Does it matter that I'm using COGS for Cost of Inventory? Are the two more or less interchangeable?
2. If it matters, and I should switch to Cost of Inventory, do I have to record the COGS as well??
3. How do I record my current assets? Quickbooks doesn't allow me to add inventory items, or to reconcile the inventory asset account.
3. I use a cash basis method. Should I switch to accrural?

QuickBooks Online

Rainflurry

Level 11

@phurabe

My questions are:
1. Does it matter that I'm using COGS for Cost of Inventory? Are the two more or less interchangeable? Yes, it matters and, no, they are not interchangeable. The reason is that you could easily offset all of your taxable income by just buying more inventory and recording it as COGS. That's why COGS is an expense at the time of the sale, not at the time of purchase. Businesses, where the sale of inventory is an income-producing factor, are required to use accrual basis accounting. Having said that, there is a provision in the tax law that allows you to account for inventory as non-incidental materials and supplies (thereby allowing you to be on cash basis) but you should consult with a CPA and/or tax attorney if you want to go that route. There is no consensus on that provision. In any case, you should not record the purchase of inventory as COGS.

2. If it matters, and I should switch to Cost of Inventory, do I have to record the COGS as well?? You record the purchase of inventory to an inventory asset account and the subsequent sale of the inventory does two things: 1) it reduces inventory by the cost of the product sold and 2) it increases the cost of goods sold by the same amount.

3. How do I record my current assets? Quickbooks doesn't allow me to add inventory items, or to reconcile the inventory asset account. When you buy inventory, assign the cost to an Inventory other current asset account. You don't need to use QB to track specific inventory items unless you want to. If your website tracks it, you can use QB solely to track the value of your inventory, not the individual items.

3. I use a cash basis method. Should I switch to accrural? See #1 above. In order to have inventory on your balance sheet, you need to be on accrual accounting. This is a discussion to be had with your CPA/tax attorney. IMO, accrual accounting provides a better picture of your business performance and it clearly reflects income which the IRS likes to see. If you switch from cash to accrual, you need to file Form 3115 (Application for Change in Accounting Method).

P

phurabeAuthor

Thank you so much for the thorough response! I have a few more clarifying questions. I tried finding more information on this process but if you could help walk me through it that would be amazing...

"You record the purchase of inventory to an inventory asset account and the subsequent sale of the inventory does two things: 1) it reduces inventory by the cost of the product sold and 2) it increases the cost of goods sold by the same amount."
Say I spend $10 on a tshirt today. In quickbooks, I record that withdraw as an inventory asset. Tomorrow, that tshirt sells for $20, and after all is said and done with taxes and fees, my merchant deposits $21.60 into my bank. I categorize that deposit into my "Etsy Bank" account, create a journal entry logging the $20 sale, $1.60 tax, $5 shipping, and -$5 merchant fee. At what point am I telling quickbooks to take $10 from the inventory asset account and move it to the COGS account?

Now say that tshirt doesn't sell this year. My inventory asset account will still say $10, but the tshirt is worth $20. Shouldn't my balance sheet show what the inventory assets are worth, and not just what I paid for them?

Rainflurry

Level 11

@phurabe

Good questions.

At what point am I telling quickbooks to take $10 from the inventory asset account and move it to the COGS account?

If you don't use QB to track your inventory, you will need to make an adjusting journal entry at the end of each month to reduce inventory and book COGS (or more frequently if you want to track your net income by day or week). Your financial reports (P&L and balance sheet) will only be accurate as of the day you make the adjusting entry in QB. When you buy inventory and assign it to your inventory asset account, it will keep increasing until you adjust it down to your actual inventory value from your website. So, let's say at the beginning of January you have $150K in inventory. During the month, you purchase $50K and on January 31, QB shows that you have $200K in inventory. Obviously, this is not your actual inventory because you sold some during the month. If your website shows your inventory is $160K, you will need to make a journal entry that reduces your inventory and books the COGS expense. To make the journal entry, go to New > Journal Entry. Then, you want to credit (reduce) your inventory by the amount of the difference between the inventory in QB and your actual inventory. In this case, it's $40K ($200K in QB - $160K actual). So, credit inventory for $40K and debit COGS for $40K. You now have the correct inventory value and COGS for the month of January. Most POS systems create this entry automatically if/when the data is transferred into QB from the POS system.

Shouldn't my balance sheet show what the inventory assets are worth, and not just what I paid for them?

No. Your inventory is always recorded at cost. Retail prices are irrelevant until you sell inventory at that price which then is recorded as income.

Rainflurry

Level 11

This post has been deleted.

@Clara Cleverence

Did you read the previous posts in this thread? Cash vs. accrual accounting, as it relates to inventory, was discussed at length.

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