QuickBooks Training Materials – Part 4

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More About Items, Inventory and Purchase Orders

Items drive many of the forms and reports associated with QuickBooks Enterprise. They are the essential element of inventory products, including raw materials and finished goods. 

In an earlier section of this training (Part II of this series), we examined the basics of Items, and Item types. In fact, we even went over the steps to add an item to your Item List.

In this section, we'll take a closer look at the use of items, especially as they relate to Inventory, Purchase Orders and Receiving.

Items – One, Two or Three Sides

Items come in many types and flavors. For example, there are service items used for services you either charge for or purchase, such as specialized labor, consulting hours and professional fees. 

Below is an illustration of a QuickBooks Enterprise Service item (default configuration):

There are two features I want to call to your attention. The first is the Red box that highlights the "Account."

This is where we designate the specific account associated with this service item. For example, if we're performing work of some type that’s a service and we'll charge our customers, we probably should select an Income item when setting up this account.

Because we only select one account for this item, we refer to this (default) item configuration as a "one (or single) sided item."

But let’s assume the specific service we need to setup is not only work our company charges a customer for, but work we subcontract to a vendor. 

In other words, this service is not only an income producing service, but a service with a direct cost. This is the second feature I want to point out – the "magic checkbox" – comes into play.

The green arrow (above) points to a little checkbox labeled, “this service is used in assemblies or is performed by a subcontractor or partner.” The terminology associated with this checkbox may change slightly from one Enterprise "flavor" to another, but essentially what this means is “TURN-ON TWO SIDES”. 

When we check the box, our Service item totally changes in configuration.

Because we checked that box, like magic our Service Item now is two-sided. It has an Expense Side on the left (in the red box) and a Revenue Side on the right (in the blue box) within the illustration above.

I can designate either a "cost" account like "COGS – Subcontractors," an "expense" like Contract Services for the expense side or any other "expenditure appropriate" account from our Chart of Accounts. 

In addition, I can select any income or revenue account from the COA for the income side of this item. 

This configuration also allows me to post the item’s cost and the item’s sale price, as well as providing different (or the same) purchase and sale descriptions.

When I use this item on a "purchase" type form like a Purchase Order, a Vendor Bill or even a Check, QuickBooks always uses the Expense Account designated on the left side of the item for reporting purposes. 

When I use this item on an "income" type form like a Sales Order, Sales Receipt or an Invoice, QuickBooks uses the Income Account designated on the right side of the item for reporting purposes.

When I use a two-sided item on an Estimate, both the "estimated costs" and "estimated revenues" appear in our job-costing reports. Therefore, the proper configuration of items is essential to proper job-costing in QuickBooks Enterprise.

The same one or two sided options also are available for Non-Inventory Parts and Other Charge items, which you commonly use on both Sales and Purchase type forms, as well as Estimates.

Inventory Type Items Have Three Sides

When inventory materials are recorded on an accrual basis, the cost of purchases or manufacturing are not recorded on the Profit & Loss Report until those materials are sold.  These costs are recorded as an "Asset" on the Balance Sheet prior to sale.

When the materials are sold, the revenue is posted to Income and the costs are posted to Cost-of-Goods-Sold. This means that Inventory Parts and Inventory Assembly items in QuickBooks Enterprise must have three different accounts associated with them, so we refer to them as three-sided items. Below is an example of an Inventory item:

The entire lower section of this Item type is devoted to the Inventory side of the equation, including the Inventory Asset Account, Reorder information, On-hand and Total-value and Valuation Date.

Using QuickBooks to manage your inventory, you can track the number of items in stock and the value of your inventory after every purchase and sale. As you order inventory items, receive the items and later sell the items from inventory, QuickBooks tracks each inventory-related transaction. You will know the status of your inventory and will have a more accurate picture of your business’s assets.

We will learn more about Inventory in another section of our training.

Purchase Orders (Optional, but Useful)

If you track inventory or you need to do job-costing, you should seriously consider using Purchase Orders in QuickBooks Enterprise. Purchase Orders turn-on automatically when we configure different preferences related to items and inventory, but they're never required.

Most companies using the Accrual Basis of Accounting will use Purchase Orders to identify encumbered or potential costs for materials and supplies they've ordered, but not yet received. 

Receiving against Purchase Orders posts the costs of materials against the financial statements. QuickBooks Enterprise offers a couple of different ways of recording these costs, we'll learn more about those methods in another section of this training.

But for now, know that QuickBooks offers Standard Receiving (by default) and Enhanced Receiving (by one-time preference).

Purchase Orders are the best way to keep track of products you order until they're received.

To order a product using a purchase order:

1. From the Vendors menu, choose Create Purchase Orders

2. In the Vendor field, choose the name of the vendor from the drop-down list

3. If necessary, change the Date and P.O. Number

4. In the Item column, select the item you wish to order from the drop-down list

5. In the QTY field, enter the quantity you wish to order

6. Change the Rate (the per item unit cost) if necessary

7. You may add a Vendor Message, such as "Please Rush Ship This Order"

8. Click Save & Close to record the purchase order

Receiving Against a Purchase Order

When you receive the items you ordered using a purchase order, you must receive those items to account for them properly. QuickBooks Enterprise allows you to receive items with a bill or without a bill from the Vendor. The procedure below describes how to enter into QuickBooks items you’ve received without a bill, which will follow later.

To receive inventory without a bill attached:

1. From the Vendors menu, choose Receive Items

2. In the Vendor field, choose the vendor from whom you are receiving

3. At the Open Purchase Orders Exist window, click Yes

4. Click the purchase order(s) against which you want to receive inventory

5. Click OK to move the information to the item receipt

6. Specify the Date that the items were received

7. If applicable, add more information to the item receipt such as a Reference number and an additional Memo

8. Click Save & Close to process the receipt

QuickBooks processes the items and adds records the receipt of the items and their cost against your financial statements.

To enter the bill:

1. From the Vendors menu, choose Enter Bill for Received Items

2. In the Vendor field, select the vendor from the drop-down and press Tab

3. This will bring up the Select Item Receipt window; select the item receipt you wish to turn into a bill (only one item receipt at a time can be turned into a bill)

4. To use the receipt date as the bill date, you can select the box Use item receipt date for the bill date; this will automatically transfer to the bill

5. Click OK

6. Enter or change the date and reference number (bill number)

7. Click Save & Close

8. Click Yes if another dialog box appears

QuickBooks changes the item receipt to a bill in the Accounts Payable account and lists the bill in the Pay Bills window.

It is highly recommended that you have inventory on hand before you enter a sale for inventory. You should enter your item receipts before entering sales.

If you do not have enough inventory on hand to sell when you are entering an invoice, you'll receive a warning. If you elect to ignore the warning, reports regarding costs of goods sold and profitability can be skewed.