inventory

Inventory Basics

• Definition: Inventory on a balance sheet is an asset account.

  • Carry a debit balance and is considered a valuable asset to the business, similar to a checking account.

Purpose of Inventory

• Inventory is not an expense when purchased; it is held for future sale.

• Example: Retail store sells tools.

  • Purchase tools from various vendors.

  • Tools have value and are recorded in the inventory account.

Recording Inventory Transactions

• At the point of sale:

  • Income Recognition: When a sale occurs, revenue is recognized.

  • Example: Sold a hammer for $10.

  • Cost of Goods Sold: Cost associated with sold inventory is recorded simultaneously.

  • Example: Hammer was purchased for $5, thus cost of goods sold is $5.

Cost of Goods Sold Explained

• Definition: Cost of goods sold (COGS) is the total cost of products or services directly related to the revenue generated.

  • Examples include retail products, landscaping services materials, and IT consulting contractor costs.

• COGS is recorded directly below income on the profit and loss statement.

Profit Calculation

• Gross Profit calculation:

  • ext{Gross Profit} = ext{Total Income} - ext{Cost of Goods Sold}

• Indirect costs (subscription costs, overhead costs) occur below gross profit and lead to net income:

  • ext{Net Income} = ext{Gross Profit} - ext{Indirect Costs}

The Matching Principle in Accounting

• Definition: Accounting principle that ensures revenues and expenses are recognized in the same period to accurately reflect business activity.

  • Without this principle, inventory purchases might be misaligned with cash inflows from sales.

  • Example: Purchasing 500 hammers all at once versus selling them gradually over months would misstate financials if the expense was recorded incorrectly.

Inventory Management in QuickBooks Online (QBO)

• Overview Navigation: Access the inventory overview through the inventory app in QBO.

  • Create and modify visible options within the overview screen.

  • Summary information available is termed "Inventory at a Glance."

  • Ability to customize the dashboard layout and export or print inventory lists.

Inventory Item Creation in QBO

• Must create inventory items before purchasing or selling.

• Access through the inventory screen:

  • Filter to only show inventory items.

  • Click on "New" and select "Inventory Item".

• Valuation Methods in QBO:

  • First In, First Out (FIFO): Default method, sells the oldest inventory first.

  • Moving Average Cost: Takes the average cost of inventory remaining when sold.

• Creating Inventory Items Steps:

  • Set appropriate category (e.g., office supplies).

  • Ensure quantity on hand is entered (usually zero if just created).

  • Assign income and corresponding cost of goods sold accounts.

Inventory Purchase in QBO

• Can record purchases as an expense or vendor bill.

• Example of Purchase Transaction:

  • Selecting vendor (e.g., Staples).

  • Adding item details.

  • Example: Order 10 binders at $5 each, total $50.

  • Save the transaction to reflect changes in inventory.

Selling Inventory in QBO

• Process sales through a sales receipt or invoice.

  • Select customer and add items sold.

  • Example: Selling two notebooks for $15 each and three binders for $20 each.

  • Save the transaction to adjust inventory counts accordingly.

Physical Inventory Count

• Recommended to perform physical inventory counts regularly (quarterly or annually).

  • Purpose: Compare physical count of items with QuickBooks' records to ensure accuracy.

• If discrepancies exist, adjustments must be made:

  • Access inventory adjustments through action column for necessary changes.