Setting up periodic inventory accounts / COGS

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@iharkins wrote:

Hello,

 

I am hoping someone can help me. I currently use a periodic inventory system, which I have been using for multiple years. I am in the process of setting up Quickbooks online. I had a beginning inventory value for this year. This is what I think I need to set up:

 

-Set up a 'Purchases' account (Other current asset)

- Set up and 'Inventory' account (other current asset, would have starting value equal to my beginning inventory for the year)

-The COGS account (the default account listed as Supplies & Materials - COGS)

 

In my head, what I need to do is at the end of each period (monthly or quarterly) is calculate COGS, and then:

Debit COGS

Debit Inventory

Credit Purchases

 

Is this correct? Thanks in advance for any input

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@iharkins 

Yes, it's correct in general except if you're on a cash basis accounting method you may want to set up the "Purchases" account also as a separate COGS line account. That's how QBO will do if you're using the perpetual inventory method with plus (or advanced) in QBO.

Thanks for the response. Could you elaborate a bit more on your first point? About setting up purchases as a seperate COGS line account? I'm not exactly accounting literate and not sure what that means. 

Also, what is the correct way to set an opening balance for my 'Inventory' account. My first thought was a single journal entry crediting that account for the amount of my 2020 beginning inventory value. Is this correct? If so, should this entry be dated 12/31/19 or 1/1/2020?

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@iharkins 

 

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"Also, what is the correct way to set an opening balance for my 'Inventory' account. My first thought was a single journal entry crediting that account for the amount of my 2020 beginning inventory value. Is this correct? If so, should this entry be dated 12/31/19 or 1/1/2020?"

Journal Entry will work fine, it should look like this:

JE Date = 12/31/2019

Debit = Inventory (Other Current Assets) - make sure valuation is at cost, not with mark-up

Credit = Opening Balance Equity

"Could you elaborate a bit more on your first point? About setting up purchases as a seperate COGS line account? I'm not exactly accounting literate and not sure what that means."

You will have two Cost of Good Sold (COGS) accounts.

1) One is when you buy inventory items, it goes to COGS - Purchases. Reverse the balance when you do periodic inventory valuation.

2) The other one is when you adjust your COGS when you sell it.

Again, this is on a Cash Basis method in QBO. On an Accrual basis, it's not the same.