QuickBooks Inventory Process - how the transactions flow from balance sheet to profit & loss

[TheSugarplum770]

Please zoom in some more. It's really hard to see. Thanks.

[nerdenterprises]

@TheSugarplum770 Make sure you use the full screen option on these. That is the only way you will get to see it well.

[TheSugarplum770]

Hello! How would you record a client retainer in QB? It's a liability when it is received, right? Thank you.

[nerdenterprises]

@TheSugarplum770 Hi I actually have several videos on this. Just search for "Customer Deposits" here or directly on my blog and you will have the answer to your question.

[TheSugarplum770]

I am confused. Please tell me how is cost of goods sold an expense? How did you calculate that?

[nerdenterprises]

@TheSugarplum770 Cost of goods sold represente the transfer of the inventory cost from the inventory asset to the Cost of Goods Sold Account. When you record an invoice in QuickBooks for a sale there are 4 things happening. (1) the sale (2) accounts receivable (3) Reduce Inventory (4) Increase Cost of Goods Sold.

Cost of goods sold is calculated in QuickBooks based on the average cost of the inventory on hand.

[chinchonchinchon]

wonderful tutorial, thanks!

[nerdenterprises]

OK just to be absolutely clear. It is true that you DO NOT need to update the item cost to update the average cost of the inventory, however, as far as best practices go, you should update the price in the item properties when prompted so that the most recent pricing is reflected there. I will record an updated tutorial to make this clear. Thanks cbartkiewicz for the feedback.

[jesusneverexisted300]

@nerdenterprises: Can't you create variance accounts (price & quantity), keep your standard cost for your inventory item, book your variance as adjustments and close the variance accounts to COGS at the end of the period? Or, does Quickbooks not allow you to manually book to COGS?

[nerdenterprises]

@jesusneverexisted300 Yes you can book directly to COGS. The main downside to that is that it side steps your 'Items' so that any reporting you do based on items will not reflect the variances you book. When my clients take inventory and we post the inventory ADJ to update the books we offset an COGS account called "Inventory Adjustments"

[jesusneverexisted300]

@nerdenterprises: Are you saying that you have created an account called Inventory Adjustment and you record all variances in that account? If so, do you have that line item right underneath COGS?? How does it appear on the income statement??

[nerdenterprises]

@jesusneverexisted300 It is another COGS account so it appears as COGS in the P&L. The idea is that if I count my inventory today and there are 3 more pieces in physical inventory count than what was on the books, it means that somewhere we booked the sale of those pieces (most likely) causing our COGS to be overstated. So the adjustment is Debit Inventory (to put the costs back into inventory) and Credit Inventory Adjustments (COGS) to correct the overstatement.

[jesusneverexisted300]

@nerdenterprises: Can I use this Inventory Adjustment account to reflect these variances? Keep in mind I am doing this kind of analysis for every material ingredient each month. Can I modify the name of this inventory adjustment account to for example, “Inventory Adjustment Quantity- Flour” and can I create another and modify it to “Inventory Adjustment Price- Flour”??

[jesusneverexisted300]

@nerdenterprises: The Debits are on the left side and the credits are on the right side. 

Direct Materials Inventory-Flour 190.98 Direct Materials Price Var-Flour 12.00

Direct Materials Quantity Var-Flour 1.92 Cash or A/P 180.00

[jesusneverexisted300]

@nerdenterprises: However it turns out I purchase 600 pounds of flour at .30 cents a pound for a total of $180.00. Perhaps the price of flour for the month has fallen and because I had special cake orders for the month, I needed to buy more flour. Ok the actual total variance is $10.98 for the month. I do an analysis and determine of this total overall variance, I have a price variance of $12.00 favorable and a quantity variance of $1.92 unfavorable.

[jesusneverexisted300]

@nerdenterprises: Let me give you a real scenario. I am hoping to start a bake goods wholesale business and I want to work with standard costing for better controls over price fluctuations analysis. I will bake all the goods from scratch. Let's say I budget for example, 594 pounds of flour at .32 cents a pound for a total of $190.98 those numbers would be my standard numbers and booked into COGS immediately.

[jesusneverexisted300]

@nerdenterprises: Ok that is very good information. Now let me ask this question....does that work for price adjustments as well?

[jesusneverexisted300]

@nerdenterprises: I made a mistake and said that the standard cost would be booked into COGS immediately. That should read it will be booked as raw inventory immediately. Sorry about that.

[jesusneverexisted300]

@nerdenterprises: You can read my post that I posted earlier to you however, I think I may have found the answer thanks to you. Basically I will create these variance accounts (price and quantity) as inventory and those accounts I will offset to the Inventory Adjustment (COGS) account you told me about. The inventory at standard cost will get recorded against the normal COGS. Thank you for all of your help!

[nerdenterprises]

It will affect cost of sales in all future transactions and that is exactly what is said. No wrong information given here.

[cbartkiewicz]

your advice given from 5:30 until 6:40 is completely wrong. Selecting update the cost only updates the price in the item properties (which is only used to populate the default cost of the item in future bills). It has NO EFFECT on the Cost of Sales of the transaction which is calculated on the average cost of the inventory item whether you select this option or not. May want to check this and repost this tutorial so you don't give out wrong information.

[hyghteck]

The value of the expense/ Cost of Goods Sold is correct. However, you do not multiply the sales price ($4.00) by the quantity sold (500) to get the expense. You have to use the value of the original purchase price/cost ($2.00) when you purchased the inventory. I am sure you know already know this. But, at 7:49 you accidentally misspoke by saying $4.00 X 500 units = $1,000 debit for COGS and a credit for Inventory.