Why is an inventory item being expensed to the cost of goods account before the item is sold on a cash basis profit and loss?

I’d like to help clarify how QuickBooks Online (QBO) manages inventory on cash basis accounting, Tyler.

On a cash basis, in a Profit and Loss report, expenses are recognized when they're paid, not when the inventory is sold. On an accrual basis, we recognize COGS solely at the point of sale for the products.

For more information on how cash and accrual basis affect reports, check out this link: Choose between cash and accrual accounting methods in QuickBooks Online.

Feel free to explore the links below for a detailed look at your inventory transactions and the effect of inventory tracking on your financial statements:

• Impacts of inventory tracking on the Balance Sheet and Profit & Loss reports in QuickBooks Online
• Use reports to see your sales and inventory status in QuickBooks Online
  
  

Fill me in if you have other inventory or QuickBooks-related concerns or questions. We'll get back to make sure everything is taken care of for you.

Regardless of cash or accrual, shouldn't the value of the inventory item sit in an asset account until it is sold?  if an item is in inventory, I would think it doesn't show on the P&L in the expense or income account until it is sold?

tyler@mattesonhe  Technically speaking, Cash basis doesn't even use Inventory.

You can't both recognize an expense when it is paid, and treat it as something that hasn't been expensed yet.

There's a reason Cash basis is generally used only by small businesses.

This response, and the way QuickBooks Online seems to work, reflect a misunderstanding of cash basis accounting vs accrual accounting.  Under cash basis accounting items of revenue, expense, assets or liabilities are recognized when cash is received or disbursed, as the case may be. The application is fairly straightforward for many if not most account types in the Chart of Accounts; however, the "working capital" accounts one typically sees under accrual accounting practices can be a bit tricky.  In fact, they arise largely to account for the timing difference between accounting recognition and the movement of cash -- which, of course, under cash-basis accounting doesn't exist.  For instance, financial assets and liabilities such as accounts receivable, prepaid expenses, accounts payable and accrued expenses have no meaning under cash-basis accounting. However, among the "working capital" account types, inventory is a bit of a different animal.  Inventory represents tangible personal property whose value on the balance sheet is recognized when "cash" is disbursed in a purchase transaction, and when that inventory is sold it is removed from the balance sheet and on the income statement the value thereof is netted from the sale revenue to arrive at gross profit.  This looks a lot like accrual accounting -- what with the matching of expense to the revenue it generated.  However, it is foremost a sale of an item of tangible personal property, and the impact of that transaction under cash-basis accounting is to be recognized when "cash" changes hands.  Intuitively speaking, if the inventory is still "on the shelf" and unsold, it should still be on the balance sheet.  The sale of any asset under cash-basis accounting would be recognized in a similar manner.  QuickBooks Online is in error when one toggles a balance sheet report from accrual to cash basis presentation, and inventory "disappears" from the balance sheet because QuickBooks Online is "expensing" that inventory at the time of purchase.  This practice is incorrect and needs to be fixed ASAP.  

@ohtobeoutdoors 

"Intuitively speaking, if the inventory is still "on the shelf" and unsold, it should still be on the balance sheet."

Cash basis accounting does not recognize inventory as @FishingForAnswers mentioned.  The fact that you think inventory should be on the balance sheet (BS) on cash basis indicates you're not familiar with cash basis accounting.  On cash basis, inventory is expensed to the income statement when purchased (cash changed hands, therefore expense is recognized), not capitalized into inventory on the BS.   

"QuickBooks Online is in error when one toggles a balance sheet report from accrual to cash basis presentation, and inventory "disappears" from the balance sheet because QuickBooks Online is "expensing" that inventory at the time of purchase. This practice is incorrect and needs to be fixed ASAP."

That's incorrect. Cash basis means expenses are recognized when paid. Therefore, when inventory is paid for, it should be expensed, not put on the BS waiting to be expensed in the same period as the revenue is recognized.  QBO properly eliminates inventory on the BS when cash basis is selected.  That's the way cash basis and QB has always been.  Nothing needs to be fixed.  But, if you carry inventory, you should be on accrual basis from a financial accounting perspective.