(This document addresses the use of the inventory management system built into QuickBooks Pro 2004. However, the general outline and (in most instances) the specifics also apply to later versions of QuickBooks.)
QuickBooks Pro 2004 uses the average cost method for calculating inventory costs. Therefore, If you need a First In First Out, Last In First Out, or some other method, do not use QuickBooks Pro 2004 to track your inventory. Instead, you could use a spreadsheet or a canned application and record the transactions in QuickBooks via general journal entry. However, if the average cost method works for you, QuickBooks provides a good inventory management system.
This system is complicated and requires good internal controls to work. Unless you are a disciplined person or inventory is a major aspect of your business (in which case the IRS would require you to track inventory for tax reporting purposes), I do not suggest you use this system. However, let’s assume that you decided you needed to use the inventory management system. I have developed the following procedures as the best way to track and account for your inventory.
In the following narrative, words in red represent menu choices in QuickBooks.
ONE
The first step in using QuickBooks Inventory Management System is to select the proper settings in the preference area.
Only the QuickBooks Administrator can change these preference settings.
1. From the Edit menu, choose Preferences.
2. Select Purchases & Vendors from the list on the left.
3. Select the Company Preferences tab.
4. Select the “Inventory and purchase orders are active” checkbox.
5. Change, as needed, these preferences:
Warn if not enough inventory to sell
Warn about duplicate purchase order numbers
To find out about the preferences for entering and paying bills, press F1.
6. Click OK.
TWO
Next, you will want to set up the proper accounts within the Chart of Accounts to insure that the inventory items are properly accounted for.
Set up inventory accounts as follows:
Go to Chart of Accounts in Lists. Go to Account, New or hit Ctrl+N.
I will use the category of “Signs” to illustrate the procedures to be used to properly account for inventory.
Under Type select “Other Current Asset.” Under name type “Inventory Asset.” This will represent what is known in accounting as a control account. No entries should ever be made to this account or to any control account. Select OK.
Set up a sub-account under the control account “Inventory Asset.” Go to Account, New or hit Ctrl+N. Under Type select “Other Current Asset”. Under name type “Signs” and designate it as a sub-account of “Inventory Asset.” Select OK.
Set up income related accounts as follows:
Go to Account, New or hit Ctrl+N. Under Type select “Income”. Under name type “Materials and Supplies.” This will represent a control account in the income category. Select OK.
Set up a sub-account under the control account “Materials and Supplies.” Go to Account, New or hit Ctrl+N. Under Type select “Income”. Under name type “Signs” and designate it as a sub-account of the “Materials and Supplies” income account. Select OK.
Set up cost of goods sold related accounts as follows:
Go to Account, New or hit Ctrl+N. Under Type select “Cost of Goods Sold”. Under name type “Cost of Goods Sold.” This will represent a control account in the cost of goods sold category. Select OK.
Set up a sub-account under the control account “Cost of Goods Sold.” Go to Account, New or hit Ctrl+N. Under Type select “Cost of Goods Sold”. Under name type “Signs” and designate it as a sub-account of the “Cost of Goods Sold” control account. Select OK.
Your Chart of Accounts is now ready to handle inventory for signs. To accommodate other items, you need not set up any more control accounts, just additional sub-accounts. In order to make your Chart of Accounts accommodate other inventory items, be sure to add the same sub-account to the control categories “Inventory Assets”, “Materials and Supplies” (an income control account), and “Cost of Goods Sold”. For example, if you wanted to set up an inventory for candles you would create a candle sub-account under the “Inventory Assets,” “Materials and Supplies,” and “Cost of Goods Sold” control accounts. You would not attempt to create the control accounts again.
THREE
Next, you must set up the Inventory Parts items. Go to Lists and Item Lists. Then select Item at the bottom left hand side of the window and select New on the pop up list or hit Ctrl+N.
The first thing we will want to do is to set up a control category for inventory items. Our first control category will be Signs.
Under Type select Inventory Part. Under Item Name type “Signs Inventory.” Under Description type “Cost of signs purchased.” Under COGS Account select “Cost of Goods Sold: Signs.” Under Preferred Vendor type the name of the preferred vendor. In this case, we will use “Peachtree Business Products.” Under Income Account choose “Materials and Supplies: Signs.” Under Asset Account select “Inventory Asset: Signs.” Select OK. This is the control account for the Signs Inventory in the Items List. I recommend that for all inventory related control accounts in the Item List you include the word “Inventory” so that it will stand out from other items in the Item List.
Now that we have the control account for the signs inventory set up in the Item List, we will never have to set up another control account for signs in the Item List no matter how many different signs we maintain in the inventory. We will just have to add a sub-category for each different sign we carry.
We will now set up in the Item List an item to track the inventory of a particular sign supplied by Peachtree Business Products. We received an invoice from Peachtree Business Products that included 8 signs with a part number of SN R P 10 which carries a cost of $17.85 excluding sales tax at 5%. The description of this part is “Sign ‘No Diving’ with Symbol.” The invoice contains the following statement – “If paid by 05/19/05 Deduct 2.00%.” Otherwise the payment is due by 06/03/2005. This is all the information we need to set the item up on the Item List as a sub-category under Signs Inventory.
Select Item at the bottom left hand side of the window and select New on the pop up list or hit Ctrl+N. Under Type select “Inventory Part”. Under Item Name/Number type “SN R P 10.” Under Subitem of select “Signs Inventory.” Under Description type “Sign ‘No Diving’ with Symbol.” Under Cost take the known cost multiplied by 100 percent plus the sales tax rate. In this case the sales tax rate is 5% so we would take the cost of $17.85 multiplied by 1.05 for a result of $18.74 as the Cost. Under Cost enter “18.74.” Under Sales Price enter what you intend to charge the customers. In this case, I arbitrarily chose a price of $22.00. Therefore, under Sales Price type “22.00.” Under COGS Account select “Cost of Goods Sold: Signs.” Under Preferred Vendor type “Peachtree Business Products.” Under Income Account select “Materials and Supplies: Signs.” Under Asset Management select “Inventory Asset: Signs.” Select OK.
Use this same procedure for setting up all other Signs to be carried in inventory.
FOUR
Be sure your QuickBooks system is set up to take advantage of available discounts and credits.
To automatically apply discounts or credits to bill payments, do the following:
- From the QuickBooks Edit menu, choose Preferences.
- Select the Purchases & Vendors icon from the list box on the left.
- Click the Company Preferences tab.
- Select Automatically use discounts and credits near the bottom of the window, and then select a Default Discount Account from the drop-down list.
- Click OK.
As you select and highlight each bill in the Pay Bills window, the amount of any discount or credits will automatically be deducted from the Amt. to Pay column for that bill.
To open the Pay Bills window, from the QuickBooks Vendors menu, choose Pay Bills.
To enter invoices for inventory items, go to Vendors and Enter Bills. Enter the vendor name under Vendor. Enter the date of the invoice under Date. In the Bill Due field, enter the date by which the bill must be paid unless the terms are other than net or Due on receipt. If the terms are 2% 10 Net 30, the system will automatically fill in the Bill Due field as thirty days after the Date field. In this particular case, we will receive a 2% discount if the bill is paid by 05/19/2005. QuickBooks will automatically take the 2% discount is the proper preferences are selected as indicated above. In the Amount Due field, type in the total amount of the invoice. In this case $690.80. Under terms, select “2% 15 Net 30.” If these particular terms do not exist, select Add New and set them up. Under Ref. No. enter the invoice number. In this case, P09527870101. Under Memo enter whatever helps identify this particular invoice.
Next, go to the Items tab for inventory items appearing on the invoice. Under the Item column, select SN R P 10 which shows up under Signs Inventory as a sub-item. Tab over to the “Qty” column and enter the number shipped from the invoice. In this case, 8. Tab over to the Class column and select “Supplies.” Repeat the steps in this paragraph for each additional inventory item.
When you have entered all items, there may be a rounding error whereby the total of the amount charged to inventory is different than the total of the bill because of trying to add sales tax to each item when the vendor will just add sales tax to the total of the products cost. If this occurs, it should only be a couple of cents and it would show up on the expenses tab. You can correct this by plugging the difference into one or several of the items in the Amount column of the Item tab or by coding it to an expense account on the Expense tab. Either way would be fine but charging the difference to an item on the Item tab would be preferred.
The result of this entry will be a debit to the Inventory Asset: Signs account and a credit to the accounts payable account.
FIVE
The idea behind the inventory accounts is to track assets until they are used. Let’s assume you used one SN R P 10 sign at Baycreek Communities. We need to send them an invoice which will charge them for the sign, record the income for the sale of the sign, reduce our inventory by the items on the invoice, and charge the cost of the sign to cost of goods sold.
Go to Customers, Create Invoices. Choose the appropriate customer from the Customer: Job field. Tab to the date and enter today’s date or another appropriate date.
In the Quantity column, enter the number of items sold – in this case one. In the Item Code column select SN R P 10 under Signs Inventory. In the Class column, type “Supplies.” Print the invoice and it will be posted to the appropriate accounts.
The entry that will be posted will debit the customers account and accounts receivable and Materials and Supplies: Signs (an income account) will be credited for the amount charged to the customer. In this case, for $22.00. The Cost of Goods Sold: Signs account will be debited and the Inventory Asset: Signs will be credited for the actual cost of the sign which is $18.74.
SIX
To see the status of your inventory go to Report, Inventory, Inventory Valuation Detail.
