 QuickBooks Online 2024, inventory tracking options, get ready and some trail mix because we're hiking on QuickBooks Online, our audit trail to success. Here we are in our get great guitars 2024 QuickBooks Online sample company file we set up in a prior presentation continuing to lay down those foundational items necessary to be able to process our normal accounting cycle, the normal accounting cycle including the entry of transactions with the use of forms typically found under the new button having the sub cycles within the full accounting cycles of the customer cycle or revenue cycle, vendor cycle or expense cycle, employee cycle or payroll cycle. As we enter these transactions we communicate with the people we do business with, customers, vendors and employees in the centers on the left sale center or customer center, expense center or vendor center and the payroll center or employee center. 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We went into the cog which usually has those foundational items we need to lay down. We looked at some of the items under the your company area including the account settings and the users and now we're focused in part on the lists here including the chart of accounts as we try to pull in our beginning balance from a prior system that we are imagining was our prior accounting system. So here are our beginning balances and we're going to be moving into this inventory item pulling that into the system noting that we saw that the original strategy we might have when setting up these beginning balances in our new accounting system you might think I'll just do a journal entry. That would be the easiest thing to do but we can't typically do that because many of these accounts have special needs such as sub ledgers such as the accounts receivable needing to be broken out by customer the inventory if we're tracking inventory in the system needing to be broken out by the items of inventory. That's going to be our point of focus here. This is often the most confusing most difficult system if we're tracking inventory within our QuickBooks system. Now note before we get into that I just want to touch on different ways that you might be tracking inventory because often times we feel like because QuickBooks has an inventory tracking system on a perpetual basis that's the only thing that we can do how and if you're not doing it that way then somehow maybe you might think you're doing it wrong or someone else is doing it wrong. That's not necessarily the case. The question is what's going to be the best accounting system for you and your business. So you might therefore use a perpetual inventory system tracking it within QuickBooks but you might also use a periodic type of inventory system. So let's talk about the differences between those before we go back in and enter our inventory items. So if I see an account that has inventory on it the question is am I tracking that within my QuickBooks system or do I have some external kind of tracking system that I'm going to be using. The first thing to note is that inventory will usually but possibly not always throw us out of the most simple kind of cash based system. Let's understand why that is the case by jumping on over to a flow chart. This is the QuickBooks desktop home page flow chart but we're just looking at the flow of the forms which will basically be the same for any type of accounting system. So when we think about inventory the problem is it kind of goes into both cycles meaning we're going to be purchasing the inventory which we can think of as part of the vendor cycle or these the purchases cycle or the accounts receivable cycle whatever you want to call it and then we're going to sell the inventory which could be thought of as part of the customer cycle or the sales cycle. So why is that the case most type of transactions are only part of one cycle or the other. So for example normally on the vendor side of things if I'm paying the phone bill or if I'm paying any other type of expense it's all in the vendor side of things generally. And then if I look at the customer side obviously when I sell services for example instead of inventory that's going to be following through the flow on the sales cycle side it's not going to really dip into the vendor side. Why does inventory cause us a problem because we're going to usually want to move away from a cashed based system onto an accrual based system. Let's first think about the simplest system a cashed based system with inventory and why that might cause us some problems. So let's say we sell inventory we sell guitars in our case. When I purchase the inventory if I purchase it with a whether it be a bill form or an expense form or a check type of form then normally we think of it if it was a cashed well if it was a cashed based system you would think that we would just expense the cost at the point of purchase that's what a cashed based system would do. We would decrease the checking account the other side going to the income statement which what's going to be the inventory expense account it's called cost of good sold. So you might just expense it right when you purchase it to cost of good sold and then when you actually sell the inventory what would then happen under the cashed based system with either an invoice or a sales form you would sell the inventory and instead of reducing the inventory at the point of sale on a cashed based system you would just record the normal thing you would record for a service business which would be an increase to revenue and an increase to accounts receivable or cash. What's the problem with that well one we're not tracking the inventory if we were to do it that way right if I if I just purchase the inventory and I put it on the income statement as cost of good sold the income statement are temporary accounts which will close out to the balance sheet so I'm not if I have a significant amount of inventory on the books then I'm not tracking the inventory I'm not managing my inventory well I'm just expensing it when I purchase it in a similar way as you might do with like supplies for example when you buy supplies you might buy a lot of paper and ink and whatnot but you might not be managing it like inventory you're just going to wait till the stockpile goes down and then you're not formally tracking it on the books as an asset type of account although you might have some internal controls over the supplies depending on how much supplies you have and again you could treat supplies in a similar way as inventory if it's a significant amount of stuff but the way we think about supplies is the same way that we can think about tracking inventory on its simple it's kind of method which would be a cash-based method so the other problem is from a revenue recognition standpoint if we were just to expense the inventory when we purchase it then we expense the inventory before we generated the revenue and that's not really what we want to do on a revenue recognition side from an accrual standpoint I want to recognize the expense not when we paid for it but when we consumed the asset in order to help us generate revenue that's why when we create the invoice and the sales receipts those are the triggering forms in a perpetual inventory system to not only record the sales side of things but also the cost of goods sold and the reduction of the inventory now if you have inventory where you don't have a lot of inventory on hand let's say you just you get a project and you you buy the materials for a particular project and then you create it and you sell the project right after you you buy the materials so in that case you have somewhat of a job cost system and you don't really have a lot of inventory on hand therefore the cash-based system might be appropriate so if I'm gonna if I was to make a guitar if I was somehow able to just make a guitar right and someone comes in they say I want a custom guitar and I go out and buy the material specifically for that guitar and I simply expense them when I purchase them to cost of good sold and then I finish the guitar and let's pretend the turnaround time is very short like a like a one day to a week then I'm just going to turn around and sell the guitar right after I bought the material specifically for that guitar so in that case you do still have a timing difference because you would have record the expense before you recorded the revenue but because we're assuming the timings are pretty close in period and because we're buying the material specifically for a per a particular project you might use the project tracking or job cost kind of system to help you out with that as well then you might be able to get away with that right because you're not basically having a whole lot of inventory on hand that's what that would be the simplest thing to do which again usually would be in a job cost kind of system where possibly you're buying stuff for a specific job so that would still be on a cash-based system however if you're holding on to a significant amount of inventory like a retail store or for buying the guitars from a vendor marking them up and then selling them then it's likely that we're going to have a significant amount of the guitars on stock in that case we can't just do a cash-based system because we're going to want to track the units of guitars that we have on hand and the cost of the guitars and we're going to want to be matching out because there could be a significant lag in time between when we purchase the guitars and then when we sell the guitars so in that case on the vendor side when we purchase our inventory guitars in our case then we're going to want to put it on the books as inventory not simply expensive and then when we sell the inventory with the invoice of the sales forms that's when we want to decrease the inventory and record the cost of goods sold now if you're doing a perpetual inventory system within the QuickBooks system that means what's going to happen is when you purchase the inventory it's not only going to put the dollar amount on the books it's also going to be putting on the books the units that were purchased on the books so now you're tracking both units and dollar amount and then when you sell the inventory it's not only tracking the sales price and the cost of goods sold dollar amounts that will show up on the income statement it will also be showing the units of inventory that have been decreased that's great and and if you can do the perpetual inventory system that would be a really nice because you have more internal controls over your inventory system however it's tedious to do because that means you have to be pretty meticulous on entering more information into the QuickBooks system and having your items all line up and managing your inventory within QuickBooks. QuickBooks is also somewhat limited depending on the extent of your inventory needs which means you might have to level up if you have more complex types of inventory needs however you could also try to track your inventory outside of QuickBooks and that and then and then run your inventory run your system within QuickBooks in a similar way as you would in a service based system in other words when I purchased the inventory maybe I just purchased the inventory I put it on the books as inventory however I'm I'm not going to record it as tracking the inventory within the system and when I sell the inventory I'm just going to record the sales side of the transaction not the reduction of inventory or cost of goods sold and then periodically on a periodic inventory system I will then make an adjusting entry based on my external account so those are kind of the methods that you could use right you could use a cashed based system possibly sometimes if you have limited amount of inventories just expensing the inventory like you normally would with any other expense the timing difference will be off but you're not holding on to a lot of inventories so you might be able to get away with that or if you have to track inventory the choices are perpetual inventory system that tracks every time you purchase and sell inventory or periodic inventory system which means that it's a simpler data input into the system and then you do periodic adjustments to the inventory so let's go back on over and show you what I mean here so if I hit the drop-down within QuickBooks when we purchase the inventory we're usually going to use an expense form or a bill form we might start with a purchase order but let's just go right to the expense form note there's two categories down here if you were to be using a perpetual inventory system you would generally have to use a product and not only use a product but add the product as a inventory an inventory item that you would then be tracking and we'll show how to set that up shortly would be like the service items we did before but now you would be tracking the inventory if on the other hand you were tracking the inventory externally and you were simply making the purchase over here you could then instead of using the item just record it to the inventory account you're increasing inventory in this case you would only be increasing the dollar amount of inventory but you would not be tracking the inventory by by the item or you might still use items down here but say it's an item that you're not tracking inventory with in other words I'm going to close this out if I go down to my transactions when we when we set the inventory up I'm sorry sales and then products and services when I add a new piece of inventory it could be a service inventory inventory item that's the one you would use to track perpetually you can call it a non inventory item meaning you're recognizing in QuickBooks that it is a piece of inventory but you're not tracking it as inventory on a perpetual system within QuickBooks possibly using some other kind of method to track the inventory and then when you sell the inventory with an invoice or sales receipt form or possibly a deposit but if I use an invoice form then when we sell the inventory we're going to be selecting the product if we have the product that we're selling as set up as an inventory item it will record the sale of the inventory it will record the decrease in the inventory from a dollar amount as well as a unit amount price and it will record the related cost of goods sold for the inventory if we're not tracking the inventory within the system when we sell the item because we said it was a non tracking inventory item it will record only the sales half of the transaction in a similar fashion as if you sold the service items and so it's not going to track the units of inventory or the dollar amount of inventory when you sell the inventory so then the question is well how do you manage the inventory then if it's not going to record that I'm going to I'm going to leave without saying so that means that every time I purchase inventory that means the dollar amount is going to go up let's imagine that we're not using a perpetual inventory system we're using a periodic inventory system we're tracking the inventory somewhere outside of the QuickBooks system then what you can do is when you buy the inventory the dollar amount of inventory is going up but you're not managing the units of inventory and then you might count the inventory physical count in an external software if you're doing a Shopify store or something like that for example or you have an Amazon system then the Amazon store or Shopify might be tracking the units of inventory for you and there and you don't and you might not want to pull in all of the perpetual inventory transactions into QuickBooks because it could overload your system and cause a lot of confusion what you might want in QuickBooks in that case is simply the summary of your financial statements and then have the detail of the inventory tracking over here now notice if you have a Shopify store or something like that you might be able to connect those stores to QuickBooks and we have a whole another course or section on that but just remember even with those connections the general idea is do you want to pull in all that inventory data in the QuickBooks possibly not the general recommendations are often no because you can track it outside and you're just going to bog down QuickBooks if you do that what if you have another system like you sell something on ground and you have a small store or something like that and you sell items well if you only sell a few items then you might actually track the inventory on ground right and if you were doing a perpetual inventory system this is basically what happens and I know this is getting into the weeds we have a whole another course on inventory tracking if you want to like dive into inventory tracking as a specialty area in and of itself but when we purchase the inventory what happens is we're tracking the units of inventory and the unit cost of the inventory to get us the total cost of the inventory so in this case we had a beginning balance here of inventory we purchased another 400 units of inventory that leaves us with 500 units of inventory now in a first in first out layered method which is what I believe QuickBooks online uses note that the cost of the inventory could change usually it goes up in times of inflation so that means that even though the units are the same I have 500 units some of them cost $50 some of them cost $55 so that that's part of the issue with tracking inventory the cost of the inventory could change even with the same units of inventory so then when I sell the inventory let's say we sell the inventory here we're selling 420 units then I have to take off the layers of inventory because I have a layer here that cost $100 and then the rest of them cost $55 so now I'm going to reduce this whole layers gone and this layers going down is going down right so that leaves me with no more of the hundred dollars and of the 400 we're left with 80 units left at the higher price of 55 if we're using first in first out this is what you would basically do this is what QuickBooks is kind of doing when you're doing a perpetual inventory system if you're doing a periodic inventory system with the same first in first out this means we're doing it outside of QuickBooks right so now I'm just going to when I do the purchases these purchases let's say for the month I purchased 400 I saw we were low so we purchased another 120 I saw we were low so we purchased another 200 the cost went up of our inventory when we make those purchases 55 60 and 62 and when I track the purchases all I'm recording are the increases in the inventory I'm not tracking the decreases when we sell the inventory until we actually do a physical count at the end of the period so when I do a physical count at the end of the period what do we know we know how many units of inventory are left and we can do our cost of goods sold equation which is going to be our beginning inventory plus what we purchased minus what is left is the difference meaning that's the units that we assume that we sold so if we're if we were in like a shop that we sold like sandwiches or something like that right or something we would say these are our beginning sandwiches that we have on hand we if we had five sandwiches on hand and we made another six sandwiches then or let's say we we made 10 sandwiches now we have 15 sandwiches that could have been sold throughout the day if at the end of the day we only have like two sandwiches left that means you know 15 minus 2 means that we sold 13 sandwiches now you might have lost some sandwiches someone might have stole a sandwich but that's going to be the general idea there's other calculations you can try to think about for shrinkage and stuff like that so that means that that I'm only going to make an adjustment at the end of the period meaning I'm going to count how many units I have left and then I'm going to do my calculation my layers calculation here for my cost of good sold for my inventory layers and then do a journal entry and that journal entry will simply be the debit of the cost of good sold and a credit to inventory so we'll just do meaning we'll decrease inventory and increase cost of good sold at the end of the month that would be a periodic inventory system so we're not going to do a periodic inventory system here we're going to do the more full service perpetual inventory system tracking the units within QuickBooks but I want to just note that a periodic system might be quite appropriate if you have something like a Shopify store and again we have or an Amazon tracking where it's tracked in another software because if you pull in all the data to QuickBooks the common thought for many people in that space right now is that's just overwhelming amount of data so you might use again a periodic type of system of some kind I also note that and we have a whole another course or section on that if you want to dive into that in more detail and you might also you might even be even simpler than that like you might within your system when you purchase the inventory you actually expense it to cost of good sold at the point that you purchase it and then you simply make an adjustment at the end of the period possibly the end of the year if you're a small business and you're simply trying to get your inventory properly recorded in order to prepare your taxes if you do that then you don't even need to do you don't even need to do adjusting entries on a periodic basis but the periodic adjusting entries if you're in a small shop or something like that and you were selling sandwiches or something then you might do a periodic inventory nightly right because every night you would count the inventory and you can make an adjustment you can an adjustment on a periodic basis that way and that might be an internal control that you can use so it depends you know what you are doing out within with the inventory so there's so don't think that there's only one way to do the inventory we're going to track the inventory this way the most complicated and sophisticated way kind of within the quick book system but there are many cases where people would rightly argue I believe that that wouldn't be the best way for a particular business scenario so whatever your business is dig into the weeds on what's the best inventory tracking we have whole other courses or sections on inventory tracking in general cost flow assumptions such as first and first out last and first out specific identification weighted average and and we also have a course or section on the Shopify store and connecting QuickBooks and whatnot to the to the Shopify or to an Amazon or to an eBay if those are areas of interest to you