To use QuickBooks inventory module, first, you need to turn on the inventory module. To turn on the inventory module, you go to Edit menu, select Preferences. From the Preferences Window, click on the Item and Inventory icon on the left side of the Window to get into the Item & Inventory preferences. Next, go to Company Preferences tab; check the check box for Inventory and Purchase Orders are Active field. Click the ‘OK’ button to save your setting.
When you add an inventory item into your item list, there are three accounts you need to associate this item with, they are COGS account (Cost of Goods Sold), Income account and Asset account (Inventory).
When you purchase an inventory item from your supplier, example: ten units of Item 123 at $100.00 each, the double entry for this item will be:
Debit: Asset account (Balance Sheet account) at $1,000.00
Credit: Accounts Payable (Balance Sheet account) at $1,000.00
At this stage, the transaction is only between Balance Sheet accounts (Inventory Asset account and Accounts Payable account). Therefore, you will not able to see this transaction as a ‘Purchase’ (Cost of Goods Sold account) in the Profit and Loss report.
When will it affecting the Cost of Goods Sold account?
When creating an invoice for the Item 123 (example: you sell five units at $150.00 each), the double entry for this invoice will be:
Debit: Accounts Receivable (Balance Sheet account): $750.00
Credit: Sales account (Profit and Loss account): $750.00
Debit: Cost of Goods Sold account (Profit and Loss account): $500.00
Credit: Inventory Asset account (Balance Sheet account): $500.00
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