Inventory reserves and tracking of the cost of products sold are also essential concepts to understand. You must understand how QuickBooks manages inventory assets, average price, and Cost of Products Sold to track inventory effectively. In this blog, you’ll learn how to measure the average cost, and will reports will help you control your inventory. QuickBooks automatically adds two accounts to your company file’s Chart of Accounts when you set up your first inventory item in your Inventory List:
- 12100 – Inventory Asset (Other Existing Asset)
- 50000 – Cost of Goods Sold (COGS)
Furthermore, each inventory object necessitates the establishment of an income account. You are not obliged to use any of the funds that are generated automatically. You have the choice of developing your accounts or subaccounts.
Please note that if one of these account numbers is already in use, QuickBooks will assign the latest accounts the following available number.
Assets in Inventory
If you pay for an inventory item with a bill, check, or credit card fee, the item’s Inventory Asset account is debited, and your A/P, bank, or credit card account is credited. Since it is an asset that you will market for potential profit, it is not debited to an expense account, and you report the expense to match the profits. Running the Inventory Valuation Summary/Detail reports for all dates is the best way to track your inventory purchases.
Cost of Goods Sold (COGS)
Inventory COGS usually is only affected when inventory items are sold on invoices or sales receipts. Run the Transaction Journal Report for the invoice/sales receipt to see the Sales/Accounts Receivable transaction and the Inventory/COGS transaction, which credits the Inventory Asset account and debits the COGS account. When you sell inventory that you don’t have, you can cause the Inventory Asset account and the COGS account to be changed by the subsequent bills, checks, or credit card charges. Number of Items Sold x Average Cost of Item is the sum on either side of the Inventory/COGS transaction.
The formula of Cost of Goods Sold (COGS)
COGS can be determined using the following equation, taking into account what is included and what is excluded:
(cost of inventory at the beginning of the reporting period) +
(other inventory purchased for sale during the reporting period) –
(cost of inventory remaining at the end of the reporting period) =
cost of goods sold
QuickBooks uses the weighted average cost to determine your inventory’s value of your inventory and the amount debited to COGS when you sell inventory. The average cost is determined by multiplying all inventory items’ overall cost by the number of items.
- You pay $2.00 on a widget. The average price per item is $2.00.
- You spend $1.50 on a second widget. (2 + 1.5) / 2 = 1.75 is now the average cost.
- You’re in the business of manufacturing widgets. The inventory/COGS exchange deducts $1.75 from COGS and credits $1.75 to inventory.
- You spend $2.00 on another widget. (1.75 + 2.00) / 2 = 1.88 is now your average rate.
- If you have any concerns about an average rate, the Inventory Valuation Overview report is the best place to start. This illustrates how QuickBooks measured the average cost of the object.
- Pick Inventory from the drop-down menu under Reports.
- Set the dates to All and then pick Inventory Valuation Overview.
- Double-click the desired object.
This material is given for educational purposes only. It should not be construed as legal, accounting, or tax advice, nor should it be used as a replacement for seeking such advice relevant to your company. There may be additional details and exceptions. The laws that apply to you can differ depending on where you live.
To End With
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