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Inventory or non-Inventory? my-wings 12-09-2006
Posted by my-wings on December 9, 2006, 4:47 pm
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>
>
> If you want to use QB's inventory you want to use "Inventory part". First
> go into Preferences and enable Inventory under Items and Inventory. Set up
> your Inventory G/L account. When you create the Item just specify the
> Inventory, COGS and Income accounts per your CoA.
>
> When you purchase items QB Debits Inventory/Credits A/P or Cash.
>
> When you sell an item, QB posts the foolowing transactions:
>
> Debit COGS/Credit Inventory (cost)
> Debit A/R (or cash)/Credit Income (sale price)
>
> This 2 part entry eliminates the need for any JE to COGS or Inventory at
> year end.
>


Laura:

Thanks for the additional information, but how do I deal with the fact that
each and every item I have is totally unique? I don't see how anything can
be updated automatically if I can't tell QB exactly what my COGS is on any
individual item, and I can't do that without entering each individual book
as an inventory item. Since QB has a limitation on # of items (11,400 I
think), this is not a viable solution. (Unless I'm missing something.)

Isn't there some way for me to establish an Inventory account that QB
doesn't try to update automatically for me?

This is driving me totally nuts. I know this is a good program...everything
else about it seems to be perfect for me. It's just the inventory part that
isn't making any sense. The QB help file says it's not appropriate to use QB
for inventory management for things like antiques, and my situation is just
like that. The problem is, QB doesn't seem to give any information on how to
proceed if QB doesn't handle inventory management for you. There still needs
to be an account for Inventory. I just don't know how to make one.

I hate to seem dense, but I just don't get it.

Alice



Posted by HeyBub on December 9, 2006, 6:05 pm
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 my-wings wrote:
>
> Thanks for the additional information, but how do I deal with the
> fact that each and every item I have is totally unique? I don't see
> how anything can be updated automatically if I can't tell QB exactly
> what my COGS is on any individual item, and I can't do that without
> entering each individual book as an inventory item. Since QB has a
> limitation on # of items (11,400 I think), this is not a viable
> solution. (Unless I'm missing something.)

Bookstores (and other numerous-item businesses - grocery, auto parts, etc.)
seldom use individual COGS. Instead, they use the "Retail Method" for
determining COGS.

The RM allows you to pretend that the COGS for a specific item is the
average of your entire inventory. For example, if you have $10,000 at retail
on the shelf and all that stuff cost you $5000, you are allowed to assume
the COGS of an individual item is 50% of its selling price.

So, if you sell an item for $20.00, you record a COGS of $10.00,
irrespective of what the twenty dollar item actually cost.

Even if you use the individual cost for each item sold in determining COGS,
you'll face the issue of multiple identical items (say books), all selling
for the same price, but that have different individual costs.

>
> Isn't there some way for me to establish an Inventory account that QB
> doesn't try to update automatically for me?
>
> This is driving me totally nuts. I know this is a good
> program...everything else about it seems to be perfect for me. It's
> just the inventory part that isn't making any sense. The QB help file
> says it's not appropriate to use QB for inventory management for
> things like antiques, and my situation is just like that. The problem
> is, QB doesn't seem to give any information on how to proceed if QB
> doesn't handle inventory management for you. There still needs to be
> an account for Inventory. I just don't know how to make one.
> I hate to seem dense, but I just don't get it.

Assume, today, you have $10,000 worth of merchandise for which you paid
$5,000. For the rest of the month, record sales. Assume sales to be $3,000.
Further, assume you paid $6,000 for another $15,000 worth of inventory. At
the end of December, you'll make the following adjustments.

Sales
Debit COGS - $1,500 (50% of the $3,000)
Credit Inventory - $1,500

Purchases
Credit inventory - $6,000
Debit Accts Payable - $6,000

Outside QB:
Inventory at retail: (10,000 + 15,000 - 3,000) = 22,000 <== keep this number
Inventory at cost: (5,000 + 6,000 - 1500) = 9,500
New ratio: 9500/22000 = 0.432

There are many ways to finesse the inventory. This is just one.

The conceptual problem may be that QB does not keep both the values for an
item (retail and cost). One has to be retained sub rosa.



Posted by Laura on December 9, 2006, 6:50 pm
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> my-wings wrote:
>>
>> Thanks for the additional information, but how do I deal with the
>> fact that each and every item I have is totally unique? I don't see
>> how anything can be updated automatically if I can't tell QB exactly
>> what my COGS is on any individual item, and I can't do that without
>> entering each individual book as an inventory item. Since QB has a
>> limitation on # of items (11,400 I think), this is not a viable
>> solution. (Unless I'm missing something.)
>
> Bookstores (and other numerous-item businesses - grocery, auto parts,
> etc.) seldom use individual COGS. Instead, they use the "Retail Method"
> for determining COGS.
>
> The RM allows you to pretend that the COGS for a specific item is the
> average of your entire inventory. For example, if you have $10,000 at
> retail on the shelf and all that stuff cost you $5000, you are allowed to
> assume the COGS of an individual item is 50% of its selling price.
>
> So, if you sell an item for $20.00, you record a COGS of $10.00,
> irrespective of what the twenty dollar item actually cost.
>
> Even if you use the individual cost for each item sold in determining
> COGS, you'll face the issue of multiple identical items (say books), all
> selling for the same price, but that have different individual costs.
>
>>
>> Isn't there some way for me to establish an Inventory account that QB
>> doesn't try to update automatically for me?
>>
>> This is driving me totally nuts. I know this is a good
>> program...everything else about it seems to be perfect for me. It's
>> just the inventory part that isn't making any sense. The QB help file
>> says it's not appropriate to use QB for inventory management for
>> things like antiques, and my situation is just like that. The problem
>> is, QB doesn't seem to give any information on how to proceed if QB
>> doesn't handle inventory management for you. There still needs to be
>> an account for Inventory. I just don't know how to make one.
>> I hate to seem dense, but I just don't get it.
>
> Assume, today, you have $10,000 worth of merchandise for which you paid
> $5,000. For the rest of the month, record sales. Assume sales to be
> $3,000. Further, assume you paid $6,000 for another $15,000 worth of
> inventory. At the end of December, you'll make the following adjustments.
>
> Sales
> Debit COGS - $1,500 (50% of the $3,000)
> Credit Inventory - $1,500
>
> Purchases
> Credit inventory - $6,000
> Debit Accts Payable - $6,000
>
> Outside QB:
> Inventory at retail: (10,000 + 15,000 - 3,000) = 22,000 <== keep this
> number
> Inventory at cost: (5,000 + 6,000 - 1500) = 9,500
> New ratio: 9500/22000 = 0.432
>
> There are many ways to finesse the inventory. This is just one.
>
> The conceptual problem may be that QB does not keep both the values for an
> item (retail and cost). One has to be retained sub rosa.

Isn't the RM used when someone is purchasing multiple copies of the same
book and each item is a different book in the inventory? I think my-wings
may have single copies of lots of books making this method impractical as
well as very inaccurate?


Posted by HeyBub on December 9, 2006, 10:04 pm
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Laura wrote:
> Isn't the RM used when someone is purchasing multiple copies of the
> same book and each item is a different book in the inventory? I think
> my-wings may have single copies of lots of books making this method
> impractical as well as very inaccurate?

The RM method is accurate, but not precise. In the era before computers, it
was a logistical nightmare to keep up with 10,000 line items in your average
bookstore or 25,000 line items (SKUs) in your average grocery. An auto parts
store may stock 20,000 different items and even a modest liquor store will
have 8-10,000 different kinds of booze.

In the RM, it makes no difference what an individual item costs, you deal
only with the aggregate average.



Posted by Laura on December 9, 2006, 5:34 pm
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>
> OK. I understand about the periodic inventory from Laura's response (Thank
> you Laura!) I do have a low volume, and I know my purchase price on every
> book sold, so it's not unreasonable for me to keep the inventory updated
> for every sale, although the interval could be longer (daily, weekly) if
> my volume increased. The part that is just driving me crazy is how to
> reconcile Quickbooks with that accounting course I too too many years ago.
>
> According to my text book, Cost of Goods Sold is a calculation:
> Beginning Inventory
> + Net purchases
> + Freight in
> = Cost of goods available for sale
> - ending inventory
> = Cost of Goods Sold
>
> So I'm thinking that I need some account called "Inventory" and my only
> choices in Quickbooks seem to be "Inventory Parts" and "non-Inventory
> Parts". I know "Inventory parts" won't work for me, and I can't really see
> that "non-Inventory Parts" is much better, but it's the only account type
> available that seems at all reasonable when I try to add an item to the
> Vendor Payment "check".

The G/L account is Inventory and the ITEMS are Inventory Parts and
Non-Inventory Parts. You need to be using both G/L accounts and Items.

> I've been reading posts all morning, and here is what I think will work. I
> would appreciate it if you could give me your thoughts.
>
> Create an item called "Books" as a "non-Inventory Part."

You may want to create several Items for each type of book. They are
Non-inventory parts since you've decided that you don't want an item for
each different type of book. Create as many Items as you feel necessary to
track at. This could be by type of book: mystery, drama, etc or even new vs
used.

>Check the "This item is used in assemblies or is purchased for a specific
>customer job" checkbox. This will enable me to associate two accounts with
>it.

Don't check the box "this item is used..." since you are not charging the
purchase directly to a customer or using assemblies. The account to specify
in this case is the COGS account. This will track your Purchases in the
equation above.

> On the "Purchase Information" side, leave the cost blank and make the
> expense account "Cost of Goods Sold". On the "Sales Information" side,
> leave the sales price blank and the income account "Merchandise Sales."

This choice of boxes will disappear when you uncheck the box.

> When I use this to enter purchases and sales, both are updated, but now
> I'm stuck. I think I need a JE to credit Cost of Goods Sold and
> Debit...what?...I still don't seem to have an inventory account anywhere.

Yes, purchases/COGs and sales/Income accounts are automatically updated as
you buy and sell the books. At the end of the accounting period you will
need to do a manual physical inventory to get your "Net inventory" in the
above equation. Plug the info into the equation and you have your correct
COGS amount for the period. Post a JE that adjusts the inventory and COGS
accounts so that the equation is completed. Your accounting book should show
you the proper JE that needs to be booked at the end of the accounting
period.

> Arggggggg! Am I on the right track or totally lost?

You are on the right track BUT I think you are looking to have QB do it for
you automatically. With perpetual inventory method (Items=inventory parts)
that works. But you are using the periodic method and QB does not do it for
you since it has no way of calculating the ending inventory. You aren't
specifying individual inventory purchase with their respective costs, etc.
You have to do a JE to get the correct ending COGS and Ending Inventory
amounts on your books.


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