This set of videos focuses on QuickBooks Online Inventory, which is available for QuickBooks Online Plus. The inventory tool offers basic quantity-on-hand tracking and reporting features.
While adding and managing basic products and services is a fairly straightforward process, the full inventory experience is quite a bit more involved and requires regular upkeep.
It’s best to start with inventory as you set up your product list, but you don’t need a clean slate to get set up (just know it will require some extra work). If you are converting from QuickBooks Desktop with existing inventory, there is a different workflow (found here). Note that inventory should be set up immediately after conversion, not later.
After enabling inventory tracking (Gear Icon [ ] > Account and Settings > Sales > Products and Services > Track Inventory Quantity on Hand), you will use the same basic workflow to create inventory items as non-inventory and service Items.
For the most part, creating an inventory item will feel very familiar. You're already well aware of how to enter information for sales price/rate, sales tax, and income accounts (if you need a refresher, review "Setting up for Success - Adding Products and Services, Customers, and Vendors"). There are, however, a few key differences and new data fields that now appear in this module.
Initial Quantity on Hand – this should be the number you have in stock right now, at this very moment. Now might be a great time to do a physical inventory of your storeroom, just to make sure. This is important to get this right because going forward, any time you sell or purchase more of an inventory item, this number will change.
Reorder point – set this to whatever feels comfortable to you. There are a number of factors to consider: the size of your storeroom, the frequency of sales (this is where reports come in handy), and how quickly your vendors can send new shipments. You will know best.
Inventory Asset Account – this is an “Other Current Assets” account created by QuickBooks to record the current value of your inventory assets.
Purchasing information – add whatever information your vendor typically provides when you place an order (i.e. model number, part/item name or SKU shows up on the invoice you receive). Also, enter the price you pay.
Expense Account - the chosen Expense account will be the Cost of Goods Sold account which will now appear on your Profit and Loss Statements. QuickBooks will calculate the cost of purchasing these inventory items after you sell it against the revenue from said item.
Inventory products will now display with this additional information on your Products and Services screen.
… save the addition of the quantity field. You can mouse-over the quantity field to see the remaining quantity on hand. Also, be very cognizant of what you put in the quantity field as this will automatically deduct from your standing inventory.
The Sales by Product/Service Summary Report is the same report you’d typically run to track your overall sales, but the Cost of Goods Sold and Gross Margin columns only apply to your inventory items. You will see the average sales price alongside the COGS figure. The Gross Margin is the revenue made from the sale of the product minus the COGS expense.
QuickBooks Online uses the First-in-First-Out (FIFO) method to average the purchasing costs for COGS when the price of an inventory item is variable. Sound complicated? Don’t worry, QuickBooks calculates those price variations for you. If you're curious about the details on how this works, check out this article.
Keep an eye on your Costs of Goods Sold numbers and the profit margin from those inventory items – make sure what you’re selling makes financial sense to your business.
The easiest way to track which items need reordering (based on the quantity you set) is to keep tabs on the stock bar at the top of the Products and Services list. Make it a habit to check every time you navigate to this menu.
When you use purchase ordersto reorder goods from vendors through QuickBooks Online, the program will automatically update and accurately track quantities.
It’s also wise to use stock numbers as a reminder to do physical inventory – any time you see a low stock notification, set aside time to look over your stock room to make sure nothing else potentially needs reordering or quantity adjusting in QuickBooks.
Remember, purchase orders are your intent to purchase inventory products. No inventory will be received or processed at that point.
When you're are ready to place an order for more inventory, create a purchase order (Create button  > Purchase Order). You can pull in existing vendor information, designate a shipping address, and even send purchased items directly to customers when they become available.
You can save customized Open Purchase Order Detail Reports and help your team stay on top of open orders by scheduling them to be emailed on a weekly basis (set for “All Dates” and called something like “Our weekly open purchase orders”). Learn more about customizing and scheduling reports.
Once you (or your customer) receives the inventory from the purchase order, process the open Purchase Order (PO). Select either an expense, check, or bill (review the expense workflow if you’re unsure) depending on when and how you pay your vendor. For all three options, all open purchase orders for the specified vendor will appear on the right after you select the vendor. You can add the transaction to the form or open it to make sure it’s the correct one.
If any numbers were different between the PO and the bill/expense, such as the quantity or amount due, adjust them now. Using this workflow closes the open PO (unless you only received a partial order). Whatever adjustment numbers you entered will be used going forward.
Use the inventory adjustment tool very, very sparingly.
Life happens. Items get lost. Accidents occur. Food spoils. There are a host of use-cases adjusting inventory, but try not to make it a habit. The more changes you make, the more complicated your accounting and explanation of your business’ assets will become.
If you’re constantly finding misalignments between your physical inventory and what’s recorded in QuickBooks, identify the source of the problem and shore it up early. If items are consistently damaged or going missing, work with your team towards operational solutions.
As the narrator notes, QuickBooks will already have Inventory Shrinkage (Cost of Goods or Expense Account) and Charitable Contributions (Expense) Accounts created for you. You can use these accounts for inventory adjustments, but you can also create your own account in the Chart of Accounts (learn more). Quantity adjustments show up on your Inventory Valuation Detail Report (below) alongside other changes that impact inventory quantities.
We’d also recommend utilizing the memo section to write notes detailing the reasons for the adjustment, written so anyone on your team can comprehend the notation.
Inventory Valuation Summary Report – a “status check” of your current inventory with the calculated average cost per inventory product (based on FIFO).
Physical Inventory Worksheet – hand this to your team when they do a physical count of your stockroom.
Inventory Valuation Detail Report – think of this as a line-by-line history of your inventory products and any changes (i.e. start, bills, purchase orders, and transactions that diminish quantity on hand) that affect them.