How to Setup Inventory to Track Cost of Goods Sold in QuickBooks

Published 02/22/2010 |

Hi – I am hoping you could help me with one question. I am using QuickBooks Pro 2005. I have used it for our semi trucking company for 4 years now. I took a class on it, and the teacher was NOT a good teacher, so I've muddled my way through, and learned quite well on my own. I had never needed the Cost of Goods Sold account before. We have now started up a second business. It will be a CB Radio sales and repair shop. I am reading such conflicting information on this account. I will be purchasing CB radios, putting them on my shelf to sell them, as well as repairing radios that are brought in. Do I need to use the COGS account for the radios I purchase and put on my shelf? Or, would they just go in an expense account as I purchase them? Everything I've read has been so conflicting. THANK YOU for any help you can give me.

I am not a tax advisor, but I can tell you that you can’t deduct the cost of your inventory until you sell it. In other words, you can’t book it directly to either expense or cost of goods sold. Instead, you book it to your inventory asset and it sits on your balance sheet until you sell it. Once it’s sold, the cost shifts from inventory to cost of goods sold where it then becomes a business write-off.

Here’s a link to Chapter 6 of IRS Publication 334 which explains it in more detail:
http://www.irs.gov/publications/p334/ch06.html

In QuickBooks, you handle this by setting up inventory part items. Go to Lists > Item List, click the Item button, select New, and select Inventory Part. Here you can setup all three accounts involved – your cost of goods sold account, your revenue account and your inventory asset account. When you use the item on a purchase transaction (enter bills, write checks, enter credit card charges, etc.), it will automatically increase inventory. When you use the item on a sales transaction (create invoice, enter sales receipt, etc.), it will not only increase income but also increase cost of goods sold and decrease inventory.

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Ruth Perryman - QuickBooks Specialist Written by +Ruth Perryman, CMA, CFE, CFM, MBA

Ruth is the president of The QB Specialists, Inc. and has provided QuickBooks help to thousands of businesses around the world since 1996. She is an Intuit Solutions Provider, an Advanced Certified QuickBooks ProAdvisor, and a member of the Intuit Trainer/Writer Network. She is also certified in QuickBooks Point of Sale and QuickBooks Enterprise Solutions.

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