I have always felt that it is important to give back. The more successful we become the more important it is to give back and help others to achieve success. If we don’t give back as much as we can then the success is literally wasted on us. So I love when clients ask me how to account for donated inventory. It means they are giving back and helping others and I love that.
When you donate inventory you essentially sell it for 0. When you sell inventory for zero what you have is a situation where your sales are zero and your inventory is then transferred at cost from the Balance Sheet Account “Inventory” to the Profit and Loss Account “Cost of Goods Sold”. So donating inventory is actually pretty simple. One additional step is required to get the cost out of “Cost of Goods Sold” and into “Charitable Contributions”. The donation is recorded at the lower of cost or market (in this and most cases that will be cost). So it is NOT recorded for the value of what you would have sold it for, but for what it cost you to acquire it.
There are 2 steps in accounting for donated inventory in QuickBooks. The first step in to record the invoice for the donated inventory. The second step is to record the transfer of cost from Cost of Goods Sold to Charitable Contributions. This means that in between these two steps we will need to determine what the cost was.
Please enjoy the video web cast:
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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.
- In Stock
- Lease or Rented out
- 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.
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Many times in all business we are faced with the situation where we are being reimbursed for an expense. In other words – I go out and purchase a chair for a client and then I sell it to that client. It is not really inventory, because I am not in the habit of selling chairs to clients. Maybe this was a onetime thing or it will happen once in a while, but not as a normal course of business. There are a few ways to handle this in QuickBooks. The first thing to understand is that the cost is not “Cost of Good Sold”. I know it seems like it should be, but Cost of Goods Sold or COGS are defined as all of the costs necessary to get our inventory ready for sale. Since this is not Inventory, we do not want to book the purchase to COGS.
We can do it one of two ways:
- First we can simply enter it in a bill or check for an expense and mark it billable to a specific client. We will encounter a problem if we want to mark it up in that QuickBooks will show the markup on a reimbursed expense. If we don’t mind our client seeing how we marked this up then this is ok. If we do not want this, then we need to take a slightly different approach within this same option. That would be to bill it through with no markup initially, then change the price once in the invoice. The problem with this is you will wind up with a negative expense.
- The second way is to enter the purchase of the item as a “Non-Inventory Part” and then bill that through. In this case you will want to link the non-inventory part to an income account, perhaps called “Reimbursed Expenses”. I know it seems weird to use the word “Expenses” in an income account title, but that is really what this is. By doing this, when you mark up the cost of the item it will net out as a positive income number instead of as an expense.
By doing this and then changing the method based on seeing the results you will wind up needing to troubleshoot this. So in the following video tutorial we go over how to make the mistakes and fix them as well.
Once you think you have entered this correctly you will want to run a Profit and Loss for that customer to be sure that the transactions are showing up correctly. Specifically you want to see that the cost of the item is in there and that what you billed for it is properly netted out by that cost. We will show you how to do this in the video tutorial that we’ve recorded online:
Please enjoy the FREE video tutorial:
Reimbursed Expenses ßClick
When you are in the business of selling products it is important to understand how those transactions flow in QuickBooks or any accounting software.
When you purchase inventory you now own something – an asset. This is not an expense. In fact because without the right marketing and customer base, you might never sell it, it is not an expense.
When you sell the inventory you have 4 things that happen:
A sale = Income
Inventory moves = reduction in invenory
Cost of Goods Sold Incurred = that reduction in inventory is offset in effect by recognizing it’s cost (which is equal in amount to the reduction in value of inventory)
Either a payment or a receivable = either I get money or someone owes me money for the sale.
The difference of course between what I sold it for and my Cost of Goods Sold (COGS) is the profit on that product sale.
In this web cast we go over how this works using QuickBooks – the accounting & bookkeeping concept is the same regardless of whether you use QuickBooks or something else.
Please enjoy the web cast by clicking here: http://nerdenterprises.acrobat.com/p20367342/
Watch the web cast here: http://nerdenterprises.acrobat.com/p97547554/
When you sell inventory (products) there is a good chance you are in the business of making the products you sell, which means that you buy some products and then use those to create a new, finished product. QuickBooks provides for this using something called “Inventory Assembly Items”. When this happens you need to account for the original inventory you purchase, called Raw Materials and then you have to account for the transfer of that inventory into the final product, called Finished Goods. QuickBooks does have its weaknesses where inventory is concerned, but this represents an improvement along those lines. When you use a properly formatted Excel Template in conjunction with QuickBooks, it can work out very well.
- Raw Materials inventory are the components that make up your final inventory. These are set up as regular inventory assembly items.
- Once the raw materials are used they go in to create “Finished Goods Inventory”. These items are called “Inventory Assembly Items”.
- When you first set up the inventory assembly items they will deduct quantities from the component inventory counts.
- After that you have to manually transfer quantities from the items to the Assembly items.
Watch the web cast here and feel free to ask questions by commenting on this blog post:
When you import an inventory item for the first time you can import the quantity, however you cannot import changes in quantity to an existing inventory item. For this there is the inventory adjustments module.
Figure 1 – this is how you adjust existing inventory item quantities
Importing your inventory listing into QuickBooks can be done easily when you understand how to set up the mapping from QuickBooks to Excel. Your inventory listing in excel has to be clean – no formatting, just columns with column headers and data. You cannot have sub-categories set up unless you already have all the parent categories set up in QuickBooks. So if you have an item that looks like this “Parts:754A” the item “Parts” must already be in the item list in QuickBooks before you do the import.
You also have to include the following columns at a minimum in your excel spreadsheet in order for the import to be effective:
Type | Item | Description | Income Account | COGS Account | Inventory Asset Account | Cost, Price | Quantity on hand.
You can have more than this, but these are required at a minimum in order for the import to work properly. There is a likelihood that you will get errors on the first try. QuickBooks will prompt you to save the error log. Usually it is something simple, so just look at the log and scroll to the errors column. Then all you have to do is fix the issues in your excel file and/or QuickBooks as you will see in this web cast. Once this is done, you just go back to QuickBooks and re-do the import. You do not have to re-do the mapping unless there was an additional column that needed to be included in the mapping. Assuming this is all set then simply repeat the steps and go right to the import. If you have successfully fixed the errors then your items will be imported. Then go to your item list and fix any hierarchy issues or make any changes needed directly there:
Figure 2 – go to your item list
Figure 3 – This is what the item list looks like
You can go in and edit any of these items by selecting the item, then click ‘Edit’ and choose ‘Edit Item’. If you want to import additional items or change to existing items you can do so by setting up a spreadsheet. It is recommended that you export your current listing as we did in the web cast to be sure that there is consistency with respect to existing items. Otherwise you may wind up with duplicate items. Also remember that QuickBooks will not import changes to the quantities of existing items.