In this QuickBooks Online 2023 tutorial, we will focus on e-commerce inventory management and cost of goods sold (COGS) using the cash basis accounting method. By following this practice problem, you will gain the necessary skills to effectively manage your bank books with QuickBooks Online.
Getting Started:
- Open QuickBooks Online in the accountant view.
- Switch between the accountant view and the business view by clicking on the cog icon at the top and selecting the desired view from the options below.
- Duplicate tabs for generating reports by right-clicking on the tab and selecting the “Duplicate” option.
Generating Reports:
- Duplicate the tab for the Balance Sheet report.
- Open the duplicated tab and wait for the report to load.
- Duplicate the tab for the Profit and Loss report.
- Close the hamburger menu and adjust the date range for the Profit and Loss report from 04/01 to 05/31.
- Select the month-by-month side-by-side view option and run the report.
- Close the hamburger menu in the tab to the left and scroll up to adjust the date range for the Balance Sheet report to match the Profit and Loss report (04/01 to 05/31).
- Run the Balance Sheet report.
- Review the reports to analyze the financial performance of your e-commerce business.
E-Commerce Inventory and Cost of Goods Sold:
- In the Shopify store or any other e-commerce platform, track the units of inventory to ensure sufficient stock to cover future sales.
- For simplicity, consider expensing the inventory as it is purchased, which avoids complex inventory valuation methods such as first in first out (FIFO) or weighted average.
- This approach may result in timing issues regarding the recognition of inventory expenses and sales.
- Make a year-end adjustment to comply with tax regulations, enabling accurate calculation of COGS and ending inventory.
In our QuickBooks Online test company file, we will be using the accountant view, which allows us to toggle between different views by going to the cog icon at the top and selecting the desired view below. To duplicate tabs for reports, simply right-click on the tab and choose the “Duplicate” option.
Inventory Tracking in E-commerce
For e-commerce businesses, inventory tracking is crucial, even though the physical products are not stored in a physical store but rather online, leveraging third-party software such as Amazon or Shopify. In previous presentations, we discussed separating sales transactions from inventory and cost of goods sold tracking, typically using a periodic inventory system.
Simplifying Inventory Tracking
In this practice problem, we will focus on the simplest method of tracking inventory: expensing the inventory upon purchase and making a year-end adjustment for tax compliance purposes. Let’s imagine we have a Shopify store where we need to purchase inventory to cover potential future sales.
Recording Inventory Purchases
To begin, we make a cash transaction to purchase inventory. As we are using the cash basis method, this purchase will eventually appear in the bank feeds. Let’s say we purchase two units of product number one at a total cost of $40.
In QuickBooks Online, we will record this transaction as an expense form. The checking account will decrease by $40, reflecting the cash outflow. Instead of tracking inventory within the system, we will directly record the expense to the cost of goods sold account. This approach simplifies the process, but it creates a timing difference between the expense and the actual sale of the inventory.
Analyzing the Balance Sheet
Checking the balance sheet in QuickBooks Online, we can see the cash decrease in the checking account by $40. The other side of the transaction is recorded in the cost of goods sold account. However, since the inventory has not been sold yet, we cannot accurately determine the cost of goods sold and ending inventory figures.
Tracking Inventory in Excel
To visualize the inventory changes over time, we will also track the inventory in Excel. In this scenario, we are assuming that we are not tracking inventory in Excel in practice, but for the purpose of this practice problem, we will use it.
Set up an Excel spreadsheet with columns for product number, units, unit cost, and total cost. Enter the inventory purchase details for product number one on April 1st, totaling $40. This simple spreadsheet will help us monitor the total cost of inventory over time.
Decoupling Inventory and Sales in QuickBooks
In our example, as sales occur, we do not record any inventory-related transactions in QuickBooks. Instead, we decouple the inventory and sales tracking. The decrease in inventory is not recorded at the time of sale, but rather when we initially purchase the inventory.
Purchasing More Inventory
Let’s assume more sales happen, and we need to purchase additional inventory. In Excel, record the purchase of one unit of product number one at $22 and two units of product number two at $105, totaling $210. In QuickBooks Online, create an expense form for these purchases, reducing the checking account by $232.
Analyzing the Balance Sheet Again
Reviewing the balance sheet, we observe a decrease in the checking account by $232. The other side of the transaction is recorded as a cost of goods sold. Remember that revenue is not linked to the inventory and cost of goods sold in
In the world of business, efficiently managing inventory is crucial to ensure smooth operations and maintain profitability. One aspect of inventory management is tracking purchases and cost of goods sold (COGS). In this blog post, we will explore a cash-based approach to recording inventory purchases and COGS, highlighting the simplicity of the process while acknowledging the benefits of using accrual accounting.
Vendor 1: Product 1 and Product 2 Let’s start by considering a vendor, Vendor 1, who supplies us with two different products. On 4/15, we purchase 260 units of Product 1 at a cost of $650 per unit, totaling $169,000. Similarly, on 4/15, we acquire Product 2, buying four units at a cost of $650, amounting to $2,600. These purchases are recorded as expenses in the cost of goods sold (COGS) account, with a corresponding decrease in the cash account.
Vendor 2: Product 3 Now, let’s introduce another vendor, Vendor 2, who offers a different product, Product 3. On 4/15, we purchase four units of Product 3 at a higher cost of $650 each, totaling $2,600. Once again, we record this purchase as an expense in the COGS account and decrease the cash account accordingly.
Subsequent Purchases: As time passes, inventory levels decrease due to sales, prompting the need for additional purchases. On 5/1, we acquire six units of Product 3, which now cost $23 each. This purchase amounts to $138, which is again recorded as an expense in the COGS account.
On 5/15, we make another purchase from Vendor 1. This time, we buy two units of Product 2 at a cost of $27 per unit, totaling $54. This expense is also recorded in the COGS account.
Price Fluctuations and Totaling Purchases: It’s essential to note that prices for the same units of inventory can change over time. On 5/15, we purchase three units of Product 3, which now cost $111 each. These three units amount to $333, reflecting the increased price.
To prepare for upcoming sales, let’s assume we plan for a substantial purchase. On 5/15, we decide to buy various products totaling $2,412 from Vendor 1, with the purpose of covering the Christmas sales period. This transaction reduces our checking account balance, emphasizing the importance of generating sales to replenish funds.
The Benefits of Accrual Accounting: While the cash-based approach provides simplicity in recording inventory purchases and COGS, it’s worth considering the benefits of accrual accounting. Accrual accounting matches the expenses of inventory purchases with the timeframe in which the inventory is sold. By using accrual accounting, businesses can gain a more accurate picture of their financial performance and make informed decisions based on real-time data.
Conclusion: Managing inventory purchases and cost of goods sold is a critical aspect of running a successful business. While a cash-based approach offers simplicity, it’s important to understand the limitations in terms of accurately matching expenses with the corresponding sales period. Businesses should evaluate the advantages of accrual accounting to gain a more comprehensive understanding of their financial position. By implementing appropriate inventory management practices, businesses can optimize their operations and drive long-term success.
Effective inventory management and accurate tracking of cost of goods sold are crucial aspects of running a successful business. However, determining the cost of inventory and matching it with sales can pose challenges, particularly when using a cash-based accounting system. In this blog post, we will explore a simplified approach to inventory management and cost of goods sold calculations, highlighting its benefits and limitations.
The Basics of Cash-Based Inventory Management: When using a cash-based accounting system, inventory purchases are recorded as expenses in the cost of goods sold (COGS) account at the time of purchase. This approach simplifies the recording process, as it directly decreases the cash account and increases the COGS account. However, it does not account for the timing differences between inventory purchases and sales.
Vendor Purchases and Inventory Tracking: To illustrate the process, let’s consider an example where multiple vendors supply different products to our business. We will assume specific purchase dates, quantities, and prices for each product. Although this simplified method does not track individual units, it provides a general overview of inventory costs.
At the time of purchase, we record the expenses in the COGS account and decrease the cash account accordingly. The COGS account reflects the total purchases from all vendors, regardless of the specific product or purchase date.
Determining Ending Inventory: To calculate ending inventory for tax purposes or financial reporting, we need to estimate the remaining inventory’s cost. Using a simplified approximation, we assume that the cost of the last purchase is the cost of the remaining inventory. While this method is not perfect, it provides a straightforward approach to estimate ending inventory.
Let’s assume our year-end is on May 31st. To calculate ending inventory, we determine the number of units remaining for each product and assign the cost of the last purchase to those units.
Adjusting COGS and Recording Journal Entries: Since our COGS account includes the expenses for all purchases made throughout the year, it may be overstated by the value of the remaining inventory. To rectify this, we make a year-end adjustment by recording a journal entry.
We increase the inventory account with the estimated value of the ending inventory, while simultaneously decreasing the COGS account by the same amount. This adjustment aligns the COGS with the estimated cost of goods sold.
Tax Implications and Cost of Goods Sold Formula: For tax purposes, the Schedule C form typically requires a cost of goods sold formula. This formula considers beginning inventory, purchases, and ending inventory to calculate the cost of goods sold. If it is the first year of business, the beginning inventory is usually zero.
By knowing the beginning inventory (if applicable), ending inventory, and the calculated cost of goods sold, it is possible to determine the purchases made during the year.
Limitations and Considerations: While this simplified method provides a practical approach to inventory management and cost of goods sold, it is important to note its limitations. The main drawback is the potential mismatch between the timing of inventory purchases and sales. Using the last purchase price as an approximation may not accurately reflect the actual flow of inventory.
To address this issue, businesses often employ more sophisticated flow assumptions, such as first-in, first-out (FIFO) or weighted average cost methods. These methods aim to match the cost of goods sold with the corresponding sales, providing a more accurate representation of profitability.
Efficient inventory management and accurate cost of goods sold (COGS) calculation are essential for successful business operations. While the process may seem daunting, especially for small business owners, a simplified approach can streamline these tasks. In this blog post, we will explore a straightforward method to manage inventory and calculate COGS, making it easier for entrepreneurs to maintain accurate financial records.
Understanding the Basics: When it comes to inventory management, timing differences between purchases and sales can complicate decision-making. However, by employing a simplified approach based on cash-based accounting systems, entrepreneurs can overcome these challenges. This approach involves making certain assumptions while focusing on essential elements like ending inventory and COGS.
Vendor Purchases and Inventory Tracking: Let’s consider a scenario where a business deals with multiple vendors supplying various products. While this simplified method does not track individual units, it provides a general overview of inventory costs. As purchases are made, they are recorded as expenses in the COGS account, reducing the cash account simultaneously. The COGS account reflects the total purchases made, regardless of specific products or purchase dates.
Calculating Ending Inventory: To determine the ending inventory for tax purposes or financial reporting, entrepreneurs need to estimate the remaining inventory’s cost. In this simplified approach, the assumption is made that the cost of the last purchase reflects the remaining inventory’s value. Although this approximation is not perfect, it offers a straightforward method for estimating ending inventory.
To calculate the ending inventory, entrepreneurs must identify the number of units remaining for each product and assign the cost of the last purchase to those units.
Adjusting COGS and Recording Journal Entries: Since the COGS account includes expenses for all purchases made throughout the year, it may be overstated if it does not account for the value of the remaining inventory. To rectify this, a year-end adjustment is necessary.
Entrepreneurs can record a journal entry to increase the inventory account by the estimated value of the ending inventory. Simultaneously, they decrease the COGS account by the same amount. This adjustment aligns the COGS with the estimated cost of goods sold and ensures accurate financial reporting.
Tax Implications and the Cost of Goods Sold Formula: For tax purposes, entrepreneurs often encounter the Schedule C form, which requires a cost of goods sold formula. This formula considers beginning inventory, purchases, and ending inventory to calculate the cost of goods sold. If it is the first year of business, the beginning inventory is typically zero.
By utilizing the beginning inventory (if applicable), the ending inventory, and the calculated cost of goods sold, entrepreneurs can determine the purchases made during the year.
Limitations and Considerations: While this simplified method provides practicality and ease of use, it is essential to recognize its limitations. The main drawback lies in the potential mismatch between the timing of inventory purchases and sales. Using the last purchase price as an approximation may not accurately reflect the actual flow of inventory.
To address this issue, businesses often adopt more sophisticated flow assumptions, such as the first-in, first-out (FIFO) or weighted average cost methods. These methods aim to match the cost of goods sold with corresponding sales, offering a more accurate representation of profitability.