Home > Inventory, Lease, Rental > Accounting for Leased or Rented Inventory

Accounting for Leased or Rented Inventory

Please enjoy the video web cast by clicking on this link

Watch The Web Cast

Watch The Web Cast

When you lease or rent equipment you have an unusual challenge in QuickBooks.

Ordinarily with inventory you buy it, hopefully sell it and never see it again because your customers love your superior product and they would never dream of returning it!

  • You have 4 things involved in the sale of inventory on the books:
    • Income (Yay we made a sale and now we have income)
    • We have a receivable (Someone has to pay)
    • We reduce inventory (because we just sold it)
    • We now recognize the cost of that inventory on the P&L (COGS)
  • QuickBooks has two areas that touch inventory in terms of set up:
    • Item List
    • Balance Sheet

Everything you set up in QuickBooks has to be set up to mirror what happens in reality. So the core issue here is how do I account for inventory when, unlike what is described above I not only hope to see it again, that in fact is my full and complete expectation. In other words, when I rent inventory out I expect it to be returned. I need a way to account for it so that I am able to keep track of what is rented or leased out vs. what is in stock. This is especially important in terms of making sure that I do not promise a customer something I don’t have.

So there are two sections of inventory that need to be set up in two places in QuickBooks.

  • Item List:
    • In Stock
    • Lease or Rented out
  • Balance Sheet
    • In Stock
    • Lease or Rented out

The mapping of the items is a little tricky and I can go over that with you in a private session. The key is making sure that the item called inventory out of stock is mapped to the Balance sheet account called inventory out of stock. You also have to choose a COGS account to map the item to. This will not matter because as you will see in the video web cast the transactions involving the transfer of inventory from in stock to out of stock will zero out. You just need to make sure that you are consistent with all items going to the same COGS account so that it does properly zero out.

  • Once you have the setup in place you need to record 2 invoices when you initially rent the car out or lease the equipment out
    • The first invoice is for the actual lease or rental contract.
      • This one is easy- you have a service item mapped to an income account for lease or rental income
    • The second one is a little more challenging. You have two line items:
      • One transfers inventory out of the “In Stock” category
      • The second line item transfers that inventory into the “Leased or Rented Out” category
  • If you book this correctly then the inventory transfers from one category to the other at cost.
  • Depreciation is calculated on the total inventory regardless of what is in or out of stock, so you will still have your “Accumulated Depreciation” account on the Balance Sheet, but you will not need to be concerned with transferring the inventory between categories at its book or net depreciated value. The inventory transfers at it’s historical cost. Your individual assets can be tracked separately in a fixed asset schedule which is usually what your CPA or tax preparer sets up for you for tax purposes anyway. Then you simply book the depreciation entry when your CPA gives it to you either monthly, quarterly or annually depending on how frequently you need to record it.

Please enjoy the video web cast by clicking on this link

  1. Kristie
    August 24, 2011 at 10:13 PM

    This is very helpful, however I am running into an issue with the correct amounts being transferred to the COGS…The in-stock item will record as one price in COGS and the leased out item will be recorded as a different amount so it doesn’t cancel out in the COGS account. Any suggestions? Thanks.

    • August 25, 2011 at 8:54 AM

      Hi! The items should be set up with ‘0’ average cost so that no cost transfers. There should be no COGS on the transfer of this inventory because you are not selling it, you are only renting it. So I would book an inventory adjustment and write the inventory values down to ‘0’. The original cost of the item(s) should be booked separately as a fixed asset on the balance sheet.

      Also please visit my main blog (this one has not been used in some time) Nerd’s Blog

  2. Kristie
    August 25, 2011 at 1:47 PM

    That makes sense for items that would only be leased. We have inventory that we both sell and lease (same item) so we would want to have some cost in there when we sell the item to go into our COGS. We also have some items that may be either sold, leased or used for our business purposes. I would assume that I can handle the “used for our business” items the same as the leased ones – just “transfer” them into a separate asset account. Thanks for your help!

  3. August 25, 2011 at 3:06 PM

    Got it. Then in your case you would want to make sure that both items have the same exact COGS (in stock and out of stock).

  4. Kristie
    August 25, 2011 at 3:33 PM

    Okay…one more question – is there an easy way to do that? When I input the invoice to remove one from in stock and add to leased out, I only get an option to input sales price (which cancel each other out) and no way to edit the ave cost that will be input into the COGS account. The two items have different ave costs due to the in stock item being replenished and therefor changing the ave cost. I haven’t done enough transactions to see how the leased out ave cost gets effected but I can’t imagine it will end up the same as the in stock item. The only workaround I’ve found so far is to look at the COGS account right after I do the transaction and then do an inventory value adjustment. That just seems like a LOT of work with a lot of room for error (or forgetting to do the last step). Do you have any easy way to keep the COGS the same for both items? Thanks.

  5. August 25, 2011 at 3:40 PM

    Whenever you make changes to an item (in stock) that affect it’s cost, you have to adjust the inventory value on the out of stock item so that it agrees. The only way is by doing inventory adjustments.

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