 QuickBooks Online 2024. Purchase of inventory using bank feeds, periodic method, and perpetual method. Get ready, some coffee, and relax, because we can even do bookkeeping on the shoreline with QuickBooks Online. At least if you can get internet connection on the shoreline. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one, because apparently the merchandisers, they don't want to be seen with us. But that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like our crunching numbers is my cardio product line. Now, I'm not saying that subscribing to this channel, crunching numbers with us, will make you thin, fit, and healthy or anything. However, it does seem like it worked for her, just saying. So, subscribe, hit the bell thing, and buy some merchandise, so you can make the world a better place by sharing your accounting instruction exercise routine. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our QuickBooks Online Bank Feed Practice file we set up in a prior presentation. Let's open those major financial statement reports like we do every time. The reports on the left-hand side within the favorites. We're going to be right-clicking on that balance sheet to open link in a new tab. Right-click on the profit and loss to open link in a new tab. Right-click on the trial balance to open link in a new tab. If you don't have that trial balance in the favorites, you can search for it. I'm going to unfavorite this one, so I have those three, and then we'll tab to the right. Close the hamburger. I'm going to put the range, the date range that is, to the first two months of 2024. 010124 tab, 022924. Selecting the dropdown so we can see that on a month by month, side by side. Let's run it, and then we'll tab to the right. Do the same thing, hamburger. I'm going to close that one. Close the bun, 010124 tab, 022924 tab, and then select the dropdown. Months is what we want, and then we'll run it. Then we'll tab to the right, and then we'll close the hamburger. QuickBooks is like one of those fancy restaurants that leave the bun open when you order a hamburger. You can actually see what's in it because they're not afraid to show you what's inside the hamburger before you start eating it. Anyway, 010124 tab, 022924, and then we'll select the dropdown and say months, and then run it to refresh it. Let's go back to the balance sheet, and now we want to think about the inventory as we saw last time. We thought about the overview process of inventory. Now we're going to be doing inventory comparing the tracking of inventory on the balance sheet, which means that when we purchase the inventory, we're going to put it on the books as an asset, as opposed to expensing it as we did last time. Last time we did the easy method, which would only work if you don't have to track inventory, and that would have a system where you purchase the inventory and sell the inventory fairly close in time. Therefore, we saw it go through the bank feeds, and then we recorded it simply to cost of goods sold. As that happened, and then we matched out the invoice because the invoice was pretty close in time. We're not holding on to the inventory. That's the only method or scenario where you would think you might be able to get away with being on a cash-based method. If you are holding on to some inventory, you're going to have to do an accrual thing. If you're in the United States, the tax code is going to basically require you to do an accrual thing, which means that you're going to have to put this stuff on the books as an asset and then expense it as you consume the inventory. There's a couple of different ways you could deal with that method, depending on what your circumstance is. One is that you can try to do a periodic inventory system where I'm not going to have the subledger tracking the actual units of inventory in QuickBooks. But there's a subledger for something like accounts receivable, for example, has a subledger that tracks the accounts receivable who owes us money by customer, the person who owes us the money. Inventory similarly would need a subledger that would track the units of inventory and the cost of inventory. It's also similar to the machinery and equipment where we're going to need a subledger tracking the units of machinery and equipment, the forklifts and the couches and whatnot, or that would be furniture, but the fixed assets and the related accumulated depreciation for that. Now, the machinery and equipment, the fixed assets are often tracked outside of QuickBooks in a subledger that might be the tax return software. Similarly, with the inventory, we might use a subledger outside of QuickBooks to track the units of inventory, which will support the dollar amount of inventory on the books, and then simply make a periodic adjustment to inventory. However, we might track inventory on what's known as a perpetual inventory system, in which case we will have the entire subledger within the QuickBooks system tracking not only units, not only dollar amounts, but also units of inventory. So like with the AR, the inventory will have a subledger report that will support not only the dollar amount, but the units. So let's go back to the first tab and let's go to the transactions on the left. I'm going to close up the hamburger, and then let's imagine once again that this office depot for the first one that we'll take a look at is for the purchase of inventory. So this time, instead of just expensing it to cost of goods sold, we're going to say we have to put it on the books as an asset. So I'm going to say I'm going to put it on the books as an asset, but I'm not going to track the units of inventory, remembering that if I had to track the units of inventory, I can't really do it once it clears the bank feeds because I don't have the items. If I select the drop down here and go into an expense form, the expense form is the form used when we have an outflow that was created from the bank feeds. Here we have the items, right? We have to add an item to tell QuickBooks what the unit is, not just assign a category, otherwise known as an account. When I have the shortened data input form from the bank feeds, they don't give us the ability to add items. So that's why I can't really track the items if I want to do that within QuickBooks, but I could do a periodic system in which I'm not tracking the items within QuickBooks, which you might do again if you have like a Shopify store or if you have an Amazon, for example, we have other courses or sections on that if you want to look at it in particular, those particular items. But oftentimes you might use that software to track the units and then just make periodic adjustments yourself or possibly have your accountant or CPA make periodic adjustment for tax purposes or something, or you might be tracking inventory in an Excel worksheet external to the QuickBooks. So that's what we will imagine. So I'm going to put this into inventory without an item. I'm just going to put the dollar amount to inventory. And then the memo office depot, we could make a rule note that if we were purchasing from office depot, we would have to be careful about the rule, because we might be purchasing supplies sometimes inventory sometimes. But sometimes we would be purchasing our inventory directly from one vendor, in which case it would be easy to then make a rule and say every time I purchase inventory, we're going to put it to cost of goods sold instead of just expensing it. I'm sorry, we're going to put it to inventory instead of just expensing it to cost of goods sold. So let's go ahead and do that. I'm going to say confirm. And then if I go to the balance sheet, we're going to say run it. And now on, I forgot if it was January or February, we entered that. Let's go into it. I should have checked the date. I can't remember. So the other side's an inventory. Here it is. So here's the inventory. It was in January. There's the 678. If I go into it, it will open up an expense form not going back to that bank feed format, but the expense form, no item being entered. We put it directly to the account of inventory, closing that out. The other side, instead of going to the income statement, it's now similar to how we treated the machinery and equipment or fixed assets. It's put on the books as an asset. We're doing an accrual thing. This is an accrual account. So if I go into it, there it is here. Here's our expense form. Every transaction has at least two accounts affected. The other account this time, however, unlike most of the outflows from our checking account, is not on the income statement. No impact on the income statement. So we added another step in the process. Instead of the easy thing to do, just expensing it when we pay it, we had to put it on the books as an asset. And then we're going to have to track it and then expense it later. Now, how would we track it? Well, we might use a sub ledger or something like this, right, to track the units of inventory. And I won't go into this in detail. Let's just imagine the simple cost of good sold calculation. So let's say that we purchased, we had, let's say that the beginning inventory, this is the formula, let's imagine in units, the beginning inventory was 110. And then we had purchases. That's what we're recording through the bank feeds when we see the cash going out. Let's say we purchased 75. That means we have the amount available for sale that we could have sold throughout the period of the sum of those two in units, right? So the sum of those two, that's what we could have sold. And if we count the units at the end, so count and period. And let's say that we only have, we have 93 left. That means that we have a cost of goods sold equal to 93 minus, I'm sorry, 185 minus 93. That means we have 92 units left, right? So I can do this calculation depending on what I'm doing. If I just sell sandwiches during the day or something like that, right? Every time I have a new shift or possibly at the end of the night, I might say there was my beginning inventory and then I purchased or made 75. And then that's how many I could have sold. I have left 93, therefore I'm saying that I sold 92 of them. Now you might say, well, you might not have sold them. You might have lost them. You might have someone stole them or something like that. And if that happened, that would be shrinkage. And there's ways that we can kind of try to estimate what the shrinkage is. But you could see this calculation as a way to kind of back into the amount that we're going to have to expense. Even if it were shrinkage or theft, we're still going to have to expense it. We would just not want to put it in cost to goods sold, but rather in shrinkage or theft or something like that. But it would still be an expense account. Now the issue here is that once I have the units, I have to convert the units to dollars. And that becomes a little bit of an issue because sometimes the dollar amount might change. The cost of the things that we're purchasing will change over time, which is where you get into the different methods that you might use to track the flow assumptions, which is commonly FIFO, first in, first out, or weighted average, or the most common two types of flow assumptions. We have courses and presentation sections or courses on that if you want to get into that in more detail. But that's the general idea. And let's say that these 92 units cost like, let's say, $1.50 or something. So then we can say, okay, that means 92 times 150. That means we have a cost of goods sold of $138. Let's make it just $2 and make it even. So we have cost of goods sold of $185. Let's say all of these are $2, so I don't have any difference. So if I convert all the units to $2, I can say, well, if I had 110 units times 2, that would be $210 worth $75 times 2 would be $150. So the sum of those two would be $370. And then there's 93 times 2 left over gives us the $186. And then if I subtract out this way, this minus this, we get to the 184. Now, in our case, if I look at it, in our case, we had zero. Let's just think about dollars. We had zero inventory to start with. And now we're purchasing inventory of $678. So the amount available would be the sum of those two. And let's imagine that at the end of the period, we had $300 worth left. So if we subtract the two out, then we'd have the cost of goods sold at $378. So I can then do a journal entry, reducing the inventory from $678 down to the $300. So we have a journal entry of this $378. So I could do this on like a yearly basis. You might just say, I'm just going to record inventory going up the entire time. And then at the end of the year, your accountant maybe can help you out for taxes to do that for a tax reasons. Or you might do it at the end of each night. You might do it at the end of the week. You might do it like at the end of the month. For example, on a periodic system, there's no transaction in the checking account. Therefore, you would do this with just a journal entry. So a journal entry, if I go to this form, let's go to the plus tab. Now, usually we would use a form whenever possible, but there is no form for this transaction. So we would default to a journal entry, which would be in the format of debits and credits. If you don't like debits and credits, you can actually use the register to create a journal entry. If there's only two accounts affected, fairly easy to do. I could go into the hamburger transactions chart of accounts. And then each balance sheet account has a register related to it. So if I look at my inventory account and go into the register, then I can create a journal entry this way. Selecting the dropdown, I wanted to make it a journal entry type of form. So this is going to be the inventory account. I'm going to say, let's say at the end of the month, let's say 022924, we're going to say that this is the periodic adjustment. And we're going to say there's a decrease in the inventory of, what do we say, 378. So 378. And then the other side's going to go to the cost of goods sold, recording the cost of goods sold basically as we go, right? So then I'm going to say save it. And so now if I go to my balance sheet and run this, so now the inventory has been periodically adjusted down to match the physical count. So if I go into it then we recorded the decrease with a journal entry and the increases would all be recorded with the bank fees as we purchase, decreases with the journal entry. The other side going to the cost of goods sold. On this side, I'm going to run it. So then we have in the cost of goods sold now under this periodic method. We would do a journal entry to periodically record the decrease in inventory and the cost of goods sold, kind of similar to recording like your fixed asset with the depreciation, right? But instead of having depreciation expense and accumulated depreciation, we decrease the inventory account directly because we actually have a physical decrease in the inventory as opposed to the equipment, which doesn't physically decrease. We just estimate the decrease or allocation of cost over the useful life. All right, so that's going to be that one. And then of course when we actually sell the inventory, which we'll talk more about in a future presentation, but when we sell the inventory, we could wait till it clears the bank and use a bank deposit to sell it because we don't have to really track the items within QuickBooks, so you could do that. Or of course you can use the invoice and the sales receipt, the typical sales forms. And if we are using items to make the sales to bill our clients, then we would be using just service items or non-inventory items because we're not tracking inventory within QuickBooks. So when we use these forms, it wouldn't have an adjustment to inventory. Okay, then the other method is the perpetual method. In that method, we're going to say as we increase inventory, we want it to track the subledger as we go. And then when we sell the inventory, we want it to decrease the subledger for the units of inventory at that time. So to do that, we have to first make sure that we set up our items. So we're going to, I'm going to hit the plus button, sales, and we go into our, let's just go to the sales tab, products and services. So we're going to need to be setting up inventory items in order to do that. So I'm going to hit the dropdown and when we have an item, it's got to be an inventory item. So let's make an inventory item. I'm going to make it item, let's say perpetual inventory item, number one. Or let's make it number two. And then we'll say, okay, so there it's got to be inventory item. You could take a picture of it if you needed to. If it had a number related to it, if you want to categorize it, you could put that here. The initial quantity on hand, we're going to say zero because we're going to be purchasing them. I'm just going to say as of the beginning of the month. And then the reorder point, I'm just going to put zero the inventory account. That's what's going to be increasing when we purchase the inventory, the sales description, what will be populating the sales forms when we sell the inventory, sales forms being sales receipts and invoices. And then the sales price, let's say we sell it for $1,000 and then that's going to be the sale of product. And then we have to purchase them. So when we purchase them, this will populate on the purchase order if we use one, the bill or the expense or check form. And let's say we buy them for $700. And then the cost of good sold account will be the account used when we sell them. If we have a preferred vendor, we can select the preferred vendor. So I'm going to say, okay, I'm also going to add, now I'm going to add, it's out of stock. Okay, that's good. All right. I know that. So then I'm going to go into the plus button. Let's go back into the transactions and let's add a transaction specifically for this now. I'm going to make another one of these bank feeds just so we can add one for inventory. So let's say that we had, this is going to be the date. This is going to be the amount description, description. And I'm going to say the review. I didn't spell that right. We're okay. All right. And so we'll say the date is on. $215. All it says 20724. And the amount, now it's not in the right format. Let's make that a date format, home tab numbers. Let's make it a date short date. Now they cost $700 each. Let's imagine that we're purchasing five of them. So this equals 700 times five. And it's going to be negative because it's an outflow. So I'm going to put a negative 700 times five. That's what we're going to see flow through the bank feeds. We'll say this comes from a firm in China. We're going to imagine that we patented something possibly and we asked the firm in China possibly to produce them for us is what I'm thinking here. Let's go ahead and save this. And then I'm also going to save it as a CSV file tab, save as browse, changing this to a CSV file, comma, deliminated, and then saving it. I'll close this out, open up QuickBooks and then within the bank feeds, I'm going to say drop down upload from a file and select. So this is the one we have. It's numbered 83 382. If you if you have access to that file that way. Next, it's going into the checking account. Next, it's is the first row of your header. It is one column. Yes. And the date is thusly formatted. It's picking up the proper headers because we had a header column. So QuickBooks can figure that out. And then that looks correct. Let's just check it off and add it. So I'm going to say yes. And then done. So now we have that one in here. So that's what we would see actually flowing through into the bank feeds, but I can't use the bank feed in order to record it because I would need to. I need to add the item. So so what I could what the normal process would be if I select the plus button up top of the hamburger and the plus would be possibly I would have to send a purchase order. You may or may not need a purchase order. This would be a non recording transaction requesting inventory that doesn't actually record anything. Let's go ahead and imagine we do that we got the purchase order. And we're going to say that this is going to go to firm in China tab. That's the name and we're going to say save. We would email it if we had an email address and then they're going to ship it to us to 12 will keep that's fine with the date. And let's say down here that the item that we're purchasing now now it's an item not a category is the item that we set up right. We set up this item perpetual inventory and we're going to be purchasing five of them. So this is just a request form doesn't actually record anything. You don't see this on the bank feeds yet right this would be not just an internal document requesting that they send it to us. We don't have to actually pay for it if we're using a purchase order until we receive it. That might not always be the case but we'll imagine that's the case here. So we'll save and close and then internally I can track that form under the expenses and I can look at my expenses tab for example and sort for the purchase orders. And so there's our purchase order under the vendors. We can also see the purchase orders open purchase orders. There's our purchase order. Now when we see the inventory oftentimes we will enter a bill. So if I look at the purchase order I can copy it to a bill. Now bill increases accounts payable doesn't hit the bank account yet. So I'll hit it. I'll do the bill and imagine we're now going to enter a bill. So now it's populating the bill. Let's say it was a couple days later that we got it. Here's quick shipping and now it's not going into a category of inventory again. It's instead creating a product but now this is recording the transaction similar to an expense account except this time it is a bill. And it's going to be increasing then the accounts payable by the 3500. That's what a bill does. The other side is going to be driven by the item what we told the item to do the item is inventory. Therefore it's going to increase the inventory and it's going to make the sub ledger for inventory tracking the units not just dollar amount. So let's go ahead and save that. So let's save and close that and check that out. So if I go to the balance sheet now and run this now we've got the inventory is going up. We can see there's the bill 3500 increase going back. We have the accounts payable increased by the 3500 boom no effect on the income statement yet. We also have a sub ledger now tracking the inventory. Let's go to the tab to the right right click on it duplicate that tab to check out the sub ledger. And we're going to go to the reports on the left hand side. I like to just type in up top inventory. I'm looking for the valuation summary close in the hand boogie change in the range 022924. We're working in the future as of when I'm doing this right. So we had five units. Now it's giving me the quantity on hand and the value and that comes out to 3500 not the not the sales price. The cost that 3500 would match our inventory here were not for us having our prior inventory that we posted to that. We didn't have an item for right because we posted something here before this that didn't have an item. So that should match what's on the balance sheet and would match what's on the balance sheet. If we hadn't done a previous method where we were looking at a periodic inventory system. All right. And then you now we might say I could wait till this clears the bank. I might pay the bill and then wait till it clears the bank. Right. And then and then record the transaction on this side because you could see right here it says it's a match now. What's it matching to its matching to the bill. So if I open this up now it's not on the categories tab. It's on the matching tab. And if I record this it will actually create the bill and match it to the and match the bill to match the payment the bill payment to the to the bill. But that's probably not how the workflow will normally happen because what's going to happen is you're going to say OK I've got my inventory and I'm going to go into my expenses here and say my I created my bill from the purchase order. And then when I pay the bill I'm probably going to record it when I pay it right that's just the easy thing to do typically. So when you pay off the bill I'm probably going to go ahead and make a payment and record the payment when I make it. So if I make a payment internally I'm not using the bank fees to do it this will decrease the checking account but I'm doing it. As I pay the bill in this case and I'm going to say it's going to be paying that China the firm and blah blah blah let's say this happened on the 18th and here's the bill so I connect to the bill. What's this going to do what's a pay bill form it's going to decrease the accounts payable and it's going to record the decrease to the cash kind of like a check form or like an expense form. But it has its own special form because it's paying down the accounts payable. So that's what it's going to do let's go ahead and save it and close it and then if I go into the balance sheet and run it. So now I can see that the checking account if I go into the checking account has decreased not with an expense form this time but a similar form in that it's like a check form or expense form. It's decreasing the checking account but the bill payment form gives you an indication that it the other side is going to accounts payable. So if you want to know the expense account or income account or asset account that was affected. You'd have to go to the actual bill so I'd have to go into here and say okay let's go into this transaction. And then I can connect it to the bill and the bill is going to tell me what I actually what actually was purchased the inventory right. So I'm going to close this back out and then go back and then the other side decreased the accounts payable. So if I go into the accounts payable this is what we expect to happen in accounts payable goes up with a bill goes down with the pay bill. That's what we would expect to see every time. If I go internally to the vendor then let's go into the vendors here and say I want to pay the last 30 days. Here's firm from China and I can see the detail right. So here's the purchase order and then we got the inventory entered the bill and then here's the bill payment. How does the bank feed fit into this. Well I still expect the thing to clear the bank but I don't need the bank feed to record the transaction anymore. So if I open this up and go into my transactions and look for that amount that cleared there it is clearing. That's great and but it's got a match on it still. So if I go into it notice it still says it's a match. So it's it's connecting it out which is great but it's not going to record a new transaction because we already recorded the receive payment. Now if that wasn't the proper match we can go to find other matches. Right and it's going to give us the other matches but this is the form it's already been recorded. So what are the bank feeds doing for us in this case it's not recording anything. It's just going to double check that what cleared the bank has been recorded on our side. We're doing a full service accounting system in this case. We already recorded it the banks double checking it. The bank feed is basically just helping us with our bank reconciliation. Let's go ahead and match it. So I'll say match it out and then there it is. So again it didn't it didn't record anything new. The financial statements should have remained the same. It's just going to help us out with our bank reconciliation to make sure that everything that clears the bank is also on our side. So let's go back to the to the balance sheet now. Now the next thing that would happen of course is then we would sell the inventory. So we'll talk more about that later but the sales forms are typically the invoice and the sales receipts. You cannot wait till the inventory clears the bank typically because if you use a deposit form which is the form used on the bank feeds for increases to the checking account. You don't have the capacity to do the items again. So you'd have to go to like an invoice when we sell to do the full perpetual inventory system. Let's say this was customer to and I'm say OK set up customer number two and let's say it was on. The 20th an invoice and let's say we sold now an item perpetual inventory. We sold one of them. They cost a thousand dollars. Now if there was sales tax we can turn on sales tax. We might talk about that later. You'd have to turn on sales tax then say that the item was taxable and then make sure that the customer if you have a customer that's not taxable you can override that the customer is not taxable. But what's this going to do? It's an invoice. It's going to increase accounts receivable. The other side is going to record the revenue of the 1000 and it's going to decrease inventory on a perpetual inventory system by $700 and amount not on the invoice but driven by the item similar to when you're at a grocery store scanning something. You see the sales price but it's also doing the cost of goods sold and the inventory then cost of goods sold the expense related to the sale is going to go up as well. Net impact on net income $1000 sales price minus the cost of goods sold and it's going to have the sub ledger impacted for the inventory tracking the units of inventory which have now gone down by one. It's also going to track the sub ledger for the customer as well. So there's actually a lot going on here and that's why the perpetual system is kind of complex. We're going to save and close it. So then if I check that out and we go to the balance sheet, run it. Now we've got accounts receivable. If I go into the AR this hasn't hit the bank yet so it's not going to be in the bank feeds. We'd have to collect on that 1000. We'll talk more about that later. The other side is going to the P&L profit and loss. It's in the income. So there's the income on the 1000 and the cost of goods sold back to the I mean the inventory back to the balance sheet inventory is going down with an invoice. The invoice is decreasing the inventory by 700 and amount not on the invoice because we have to give the invoice to the customer. And so we don't have it on the invoice but the system knows about it. And the other side of that goes to the income statement. So it's recording the cost of goods sold and decreasing of the inventory on a perpetual inventory method recording the expense at the same time that we record the income. So instead of us doing it periodically, it's doing it perpetually. But you have to use the proper forms for it to do that and you have to track the proper inventory and have all the items set up properly for that to happen. So if you can make all that happen, it's beautiful. If not, which is easy in a lot of instances that might not be the best way to go. So make sure you look into that. If I go back on over to the balance sheet, then this inventory would match what's on the inventory valuation summary. Which is now, if I run it down to four units at $2,800, that's what would be here if it weren't for the fact that we did the perpetual thing and messed up the balance when we were doing the perpetual inventory. So the sub ledger now is inside of QuickBooks. We're not tracking it outside of QuickBooks. We have the sub ledger tracking the units. QuickBooks Online typically uses the first in first out method to help track that. Okay, so then this is where we stand on the balance sheet right now. So we have our assets are no liabilities at this point and equity. We're at a positive balance assets minus liabilities of 298. But much of that none of it is cash right all the positive balance we have over here. We actually have an overdrawn of cash. It's all in receivables, which we don't have inventory and machinery. So we have a major cash flow issue if this was actually where we stood, even though we have a positive net balance on the balance sheet, which could, you know, clear that's what we have to be mindful of sometimes. Okay, and then on the income statement, we've got we've got the income minus the expenses gets us to 298 that 298 is part of the balance sheet in the equity section. If we come look at the trial balance, which I think is the best balance if you're following along with this practice problem to check our numbers. We then have the balance sheet on top of the income statement balance sheet accounts assets checking accounts receivable inventory machinery equipment liabilities accounts payable. We don't have anything in it equity opening balance retained earnings and then the income statement. The income statement income minus expenses, which can be squished down into one number net income, which will automatically roll into retained earnings. If and when we get to the next year as we can see if we go to 010125 to 010125. So now the net income has been squished into the retained earnings. So if your numbers don't tie out to these numbers and you've been following along, try changing the date range. It's often a date issue when we're working practice problems that are not actually in real time, expand the date range. And then you can if there's a difference, you can drill down on it and you could you could drill down to the source document, right? To the source form and change the date oftentimes of the source form so everything will tie out.