Inventory and Purchase Orders

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Objectives

1. Activate the Inventory function2. Set up Inventory Items in the Item list3. Use QuickBooks to calculate the average cost of inventory4. Record sales of Inventory using sales forms5. View the accounting entries behind the scenes of inventory

sales using the Transaction Journal report6. Use purchase orders to order inventory7. Receive against purchase orders8. Adjust your inventory9. Create Inventory Assembly Items and Build Assemblies10. Create reports about inventory

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QuickBooks Tools for Tracking Inventory

The Vendor Navigator shows a graphical representation of the steps involved in managing inventory

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Summary of Inventory Transactions

Business Transaction

QuickBooks Transaction

Accounting Entry Comments

Purchasing Inventory with Purchase Orders

Non-posting entry used to record Purchase Orders.

You don’t have to use purchase orders. If you do, QuickBooks tracks the status of your orders and matches them with the bill from your vendor.

Receiving Inventory (no Bill from Vendor)

Increase (debit) Inventory, increase (credit) Accounts Payable. Increase inventory counts for each item received.

Use this transaction when you receive inventory items that are not accompanied by a bill. This transaction enters an item receipt in the Accounts Payable account. Although it increases A/P, no bill shows in the Pay Bills window.

Receiving Inventory (with Bill from Vendor)

Increase (debit) Inventory, increase (credit) Accounts Payable. Increase inventory counts for each item received.

Use this transaction when you receive inventory accompanied by a Bill from the vendor.

Entering a Bill for Previously Received Inventory Items

No change in debits and credits. This transaction only changes an Item Receipt transaction into a bill.

When an item receipt is turned into a bill, QuickBooks shows the bill in the Pay Bills window.

Purchase Inventory with Check or Cash

Increase (debit) Inventory, decrease (credit) Checking.

Use this transaction when you buy inventory with a check. If you use cash to buy inventory, use the Write Checks window of a Petty Cash account.

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Tracking Inventory with QuickBooks

1. When you use Inventory Part Items to track your inventory, QuickBooks handles all the accounting for you automatically

2. QuickBooks keeps a perpetual inventory, meaning that every purchase and every sale of inventory immediately updates all your account balances and reports

3. When QuickBooks calculates the cost of inventory, it uses the average cost method and does not support the first-in, first-out (FIFO) or last-in, first-out (LIFO) methods

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Objective

Activate the Inventory function

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Activating the Inventory Function

1. The first step in using QuickBooks for inventory is to activate Inventory in your company Preferences

2. Select the Edit menu and then select Preferences

Scroll down in the Preferences window and click on Purchases & Vendors

Click the Company Preferences tab

Make sure that the box next to Inventory and purchase orders are active is checked

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Accounts for Tracking Inventory

Inventory Asset

A special Other Current Asset account that tracks the cost of each inventory Item purchased. This account increases (by the actual purchase cost) when inventory is purchased, and decreases (by the weighted average cost) when inventory Items are sold.

Cost of Goods Sold

Cost of Goods Sold is subtracted from total Income on the Profit & Loss report to show Gross Profit. QuickBooks automatically increases Cost of Goods Sold each time you sell an inventory Item.

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Objective

Set up Inventory Items in the Item list

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Setting up Inventory Items Parts

1. Select the Lists menu and then select Item List.

2. Select the Item menu at the bottom of the list and then select New

3. Select Inventory Part from the Type drop-down list

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Setting up Group Items

1. Group Items allow you to bundle products and/or services on sales forms

2. While setting up a new item, Select Group from the Type drop-down list

3. List each item that is included with this group and indicate the quantities of each item

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Objective

Use QuickBooks to calculate the average cost of inventory

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Calculating Average Cost of Inventory

1. When you use an inventory Item on a purchase form (e.g., a Bill)

QuickBooks increases (Debits) the Inventory Asset account for the actual cost of the inventory purchase and recalculates the average cost of all Items in inventory

2. When you use an inventory Item on a sales form (e.g., an Invoice)

QuickBooks increases (debits) Cost of Goods Sold and decreases (credits) Inventory Asset for the average cost of the items

3. Each time you sell inventory Items The average cost per unit is multiplied by the number of

units sold Then this amount is deducted from the Inventory Asset

account and added to the Cost of Goods Sold account

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Example of Average Cost of Inventory

Situation/Transaction Calculation

You have ten 104-Sliders in stock. Each originally costs $300.

10 units X $300 per unit = $3,000 total cost

You buy three new 104-Sliders at $325 each.

3 units X $325 per unit = $975 cost

The combined cost in inventory. $3,000 + $975 = $3,975

The average cost per unit is equal to the total cost of inventory divided by the total units in inventory.

total cost/total units = average cost/unit

$3,975 / 13 = $305.77 avg. cost/unit

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Objective

Record sales of Inventory using sales forms

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Selling Inventory Items Using an Invoice Form

When you sell inventory, always use an Invoice or a Sales Receipt to record the sale

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Objective

View the accounting entries behind the scenes of inventory sales using the Transaction Journal report

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Creating a Transaction Journal Report

To see how this Invoice affects the General Ledger, use a Transaction Journal report

Select the Reports menu and then select Transaction Journal (or press CTRL+Y)

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Objective

Use purchase orders to order inventory

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Purchase Orders

1. Use Purchase Orders to track inventory purchases, and to easily determine which items you have on order

2. If you use purchase orders, you’ll be able to create reports that show what is on order and when it is due to arrive

3. Purchase orders do not post to the Chart of Accounts, however, QuickBooks tracks Purchase Orders in a non-posting account called Purchase Orders (at the bottom of your Chart of Accounts)

4. Select the Vendors menu and then select Create Purchase Orders

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Objective

Receive against purchase orders

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Options for Receiving Inventory

1. You have two options for receiving inventory: You could pay for items at the time you receive them In this case, you’ll use Write Checks or Enter Credit Card

Charges to record your receipt of inventory

2. Alternatively, you could issue a purchase order and later receive part or all of the order

If the bill doesn’t accompany the shipment, use the Receive Items function

When the bill comes, use the Enter Bill for Received Items function

If you receive the bill when you receive the order, use the Receive Items with Bill function

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Receiving Inventory

Following situations may arise when you are receiving inventory

Purchasing Inventory at a Retail Store with Check or Credit Card

Receiving Shipments against Purchase Orders Creating Open Purchase Orders Reports Checking Purchase Order Status Entering the Final Shipment Entering Bills for Received Inventory Handling Over shipments Handling Vendor Overcharges

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Purchasing Inventory at a Retail Store with Check or Credit Card

1. If you buy inventory at a retail store, use the Write Checks or Enter Credit Card Charges functions to record the purchase

2. Record the purchased items using the Items tab at the bottom of the check or credit card charge window

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Receiving Shipments against Purchase Orders

1. Select the Vendors menu and then select Receive Items

2. If you select to use the open purchase order, QuickBooks fills in the Item Receipt with the information from the Purchase Order

3. When you record an Item Receipt,

QuickBooks increases (credits) Accounts Payable for the total amount of the Item Receipt

It also increases (debits) Inventory for the same amount

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Creating Open Purchase Orders Reports

Select the Reports menu, select Purchases, and then select Open Purchase Orders

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Checking Purchase Order Status

1. You can see what’s been received already on this PO

2. The whole PO remains “open” until all items are received

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Entering the Final Shipment

When the final shipment arrives, enter another Item Receipt

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Entering Bills for Received Inventory

1. Select the Vendors menu and then select Enter Bill for Received Items

2. Enter the vendor name and press TAB to see a list of shipments received from this vendor

3. Select one shipment at a time to record the amount of the bill for each

4. QuickBooks displays the Item Receipt and automatically checks the Bill Received box

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Keep Over shipments

1. Override the number In the Qty column on the Item Receipt

2. This increases the Inventory Asset and Accounts Payable accounts for the total amount of the shipment, including the over shipment

3. When the bill arrives from the vendor, match it with the Item Receipt and pay the amount actually due

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Send Back Over shipments

1. Override the number in the Qty column on the Item Receipt so that it exceeds the quantity on your Purchase Order

2. This increases the Inventory Asset and Accounts Payable accounts for the total amount of the shipment, including the over shipment

3. When you return the excess items, create a Bill Credit for the vendor

4. On the Bill Credit, enter the quantity returned and the cost for each item

5. If you receive a refund from the vendor, record the refund

6. To apply the Bill Credit to an unpaid bill for that vendor, use the Pay Bills window

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Handling Vendor Overcharges

1. If the vendor refunds your money, add the refund directly onto your next deposit Code the deposit to the account and class you

used when you recorded the overcharge on the bill

2. If the vendor sends you a credit memo Enter a Bill Credit Code the Bill Credit to the account and class you

used when you recorded the overcharge on the bill

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Objective

Adjust your inventory

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Adjusting Inventory

1. Inventory can be manually adjust in case of An increase or decrease in the value of your

inventory on hand Change quantity of inventory items

2. Select the Vendors menu, select Inventory Activities, and then select Adjust Quantity/Value on Hand

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Adjusting the Quantity of Inventory on Hand

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Adjusting the Value of Inventory

Click on the Value Adjustment box to change inventory value

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Objective

Create Inventory Assembly Items and Build Assemblies

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Inventory Assemblies (only available in QuickBooks Premier)

1. If you build or assemble items from raw materials, you can create an Inventory Assembly Item in QuickBooks to track your assembled inventory

2. An Inventory Assembly is defined by specifying which components (must be inventory items) are needed to produce it

3. Essentially, you define the Bill of Materials for each Inventory Assembly Item when you set up the item.

4. When you “build assemblies” from Inventory Items into Assembly Items, QuickBooks automatically adjusts the quantities and values on hand of the inventory items (components) and the assemblies (finished goods)

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Objective

Create reports about inventory

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Inventory Reports

1. Inventory Item QuickReport 2. Inventory Stock Status by Item Report 3. Inventory Stock Status by Vendor Report 4. Inventory Valuation Summary Report 5. Inventory Valuation Detail Report

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Summary of Key Points

1. Activate the Inventory function2. Set up Inventory Items in the Item list3. Use QuickBooks to calculate the average cost of inventory4. Record sales of Inventory using sales forms5. View the accounting entries behind the scenes of inventory

sales using the Transaction Journal report6. Use purchase orders to order inventory7. Receive against purchase orders8. Adjust your inventory9. Create Inventory Assembly Items and Build Assemblies10. Create reports about inventory