Should I use COGS when buying construction material?

jessfoster · ‎October 15, 2018

I know this questions been asked many times, and there's always multiple answers. I usually see COGS recommended first because how well it works in P&L. But then I see people mention that when you do taxes, COGS requires a bit more work.

We flips houses. Our contractors go and buy materials from home improvement stores to take to the jobsite and use immediately. I've set that up as an double sided non-inventory item. When choosing the expense accounts should I use COGS?

Ultimately, the decision comes down to what is satisfactory for tax time but also works well for P&L as well. So

Is COGS the best choice for expense acct or do you recommend a different expense acct for materials?
If so is it as efficient as using COGS?

THANKS!

Raywhite28 · ‎October 15, 2018

You should get the contractors guide to QuickBooks. There's information there on spec homes.

This is how I understand it. You buy the home for price "A". You do renovations labor & material at cost "B". You price of the home is now "C", which A+B. Your COGS gets recorded when you sell the home. Technically, the home is inventory until you sell it. Again this is my understanding.

You should discuss it with your accountant. They should be able to advise you better.

View solution in original post

Raywhite28 · ‎October 15, 2018

You should get the contractors guide to QuickBooks. There's information there on spec homes.

This is how I understand it. You buy the home for price "A". You do renovations labor & material at cost "B". You price of the home is now "C", which A+B. Your COGS gets recorded when you sell the home. Technically, the home is inventory until you sell it. Again this is my understanding.

You should discuss it with your accountant. They should be able to advise you better.

qbteachmt · ‎October 15, 2018

"We flips houses. Our contractors go and buy materials from home improvement stores to take to the jobsite and use immediately. I've set that up as an double sided non-inventory item. When choosing the expense accounts should I use COGS? "

That is Other Asset for you. Think of this as Invested in the project. You have nearly No Expenses or COGS, while Flipping property.

Your Items can be marked Not as reimbursed, single-sided and link to Other Current Asset, until the project is complete.

When it is complete, that is an inventory asset on hand, waiting to sell.

When it sells, for the date of the sale the total invested is then Offset to COGS, because now, it Sold.

Raywhite28 · ‎October 15, 2018

Thanks for the confirmation!

Anonymous · ‎April 05, 2019

This isn't clear and please explain more.

Anonymous · ‎April 05, 2019

I work for a construction company as a bookkeeper. When we buy materials for the project, for example, tiles for $1500, I record $1500 as COGS for the project. But is it supposed to be inventory first then, later do journal entry to move from inventory to COGS?

HoneyLynn_G · ‎April 05, 2019

Greetings, @Anonymous.

I'm glad you join this conversation. I can share some insights about recording inventory in QuickBooks Online.

QuickBooks automatically adds the Inventory Asset-Other Current Asset and Cost of Goods Sold (COGS) accounts when setting up your first inventory item.

There isn't a need for you to create a journal entry anymore to move the amounts from inventory to COGS. All you have to do is to properly enter and set up the item and its corresponding income account. The inventory tracking feature is available to QuickBooks Online Plus and Advanced subscribers.

For additional reference, I recommend checking these articles:

That should get you on the right track, @Anonymous. Keep me posted if you have other inventory concerns. I'm always here answer your inquiries. Wishing you all the best!

Anonymous · ‎April 05, 2019

Thanks for the quick answer. Ok, I don't need to do journal entry. How about the first part that I mentioned, is it correct for $1500 put into CODS directly?

FritzF · ‎April 05, 2019

Thanks for getting back to us, @Anonymous.

Allow me to step in for a moment and share some additional information about inventory and COGS in QuickBooks Online (QBO).

Yes, you can record the materials you bought as COGS. QuickBooks will automatically calculates the COGS amounts upon the sale of your items. However, you may also consult with your accountant for further assistance. They can provide expert legal and accounting advice on how to properly account this, so it does not throw off your financial records.

This should answer your concern. You can always check out the articles provided by my colleague @HoneyLynn_G above for future reference.

Please let me know if you have any follow-up questions in the comment section. I'm always here to answer them. Take care and have a good one.

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Should I use COGS when buying construction material?