Accounting: Understanding and Using Items and COGS

This tutorial discusses the use of Items and COGS in QuickBooks. Learn what an item is, how to use items with invoices, and how to use items with COGS in Intuit QuickBooks.

Author: Patricia Lynn

If you are new to Accounting, we encourage you to first read our tutorial Accounting: Making Sense of Debits and Credits.

What are Items?

For most users, QuickBooks "Items" can be defined as "categories." Items are created by the user and each Item must be linked to an account - often a revenue account. Multiple Items may be associated with the same account.

photo of a one hundred dollar bill

For instance, a hardware store's revenue account "Sales" could have many associated Items; such as: plywood, hammers, nails, and plumbing supplies.

Items allow users to subdivide an account into categories meaningful to their business. By creating Items, a business can track their sales per category (Item) within QuickBooks.

The only other way to track sales by category using accounting software is to create separate revenue or income accounts for each sales category. This could result is a very large Chart of Accounts. This would be acceptable if your Profit and Loss statement had to show revenue income by sales category. But QuickBooks' "Sales by Item Summary" and "Sales by Item Detail" reports should suffice for most customers.

How Do You Create An Item?

Open your company file in QuickBooks. From the top menu line, click Lists | Item List. At the bottom, click Item and then click New.

Click the dropdown arrow next to "Type" and review the choices displayed. For consulting or professional services, choose Service. For products that you purchase, track as inventory, and resell, choose Inventory Part For purchased products not inventoried; such as materials for a particular job or products that are shipped directly by the vendor, choose Non-inventory Part.

Then, for each Item, choose the account to which it will be linked. For the Types discussed above, the account will typically be a revenue account such as Sales. As you can see in the "New Item" window, you can create Subitems as well. And you can hard-code the price of the Item if you wish.

Before creating Items for your business, it is imperative that ample planning be done to select Items and Subitems that will best represent your products or services.

Items and Invoices

Items are required when creating an invoice in QuickBooks. Each invoice contains a column called Classification (or Item or Item Code). When the dropdown arrow in the column is clicked, the Item List displays, and an Item must be selected. By default, Items do not appear on the printed invoice.

When the invoice is created, the revenue account to which the Items are linked is credited and Accounts Receivable is debited. When the invoice is paid, Accounts Receivable is credited and Cash (checking account) is debited.

How Many Items Do I Need?

If you provide general computer consulting and cannot or do not wish to categorize how you spend your time, create one Item, name it "Consulting," and associate it with your revenue or income account.

Another consultant may want to break down how the consulting time is spent by creating multiple Items; such as: Financial, Computer, and Sales. He would create 3 Items.

A business selling a large amount of products may wish to create an Item for each product group and a Subitem for each product which includes the product's price.

Items for Cost of Goods Sold (COGS)

Another popular use of Items in QuickBooks is for Cost of Goods Sold (COGS). When you sell a product, you seldom make 100% profit. Costs that are directly associated with the product are called Cost of Goods Sold (COGS). Costs of Goods Sold include the cost of material, labor, subcontractors, and shipping.

If you purchase and resell parts, your profit is the difference between how much you paid for the parts and how much you sold the part for. What you paid for the part should be classified as a COGS.

Costs that are directly related to a customer job should be posted to a COGS account, not an Expense account, so a business owner can determine Net Profit.

Difference Between COGS and Expense

To qualify for a COGS, the part or supply must be used up in the sale or service. If you purchase a ream of paper for a print job for a customer, is it a COGS? Yes, if you consume the entire ream. Otherwise, the paper is an Expense.

If you pay a subcontractor for a particular job, his cost is a COGS. So is the cost of shipping the product to the customer. Small tools are typically Expenses and not COGS - unless a tool is bought for a particular job and will never be used again.

Creating a Cost of Goods Sold Account in QuickBooks

Before creating Items that link to a COGS account, first must make sure a COGS account exists. View your Chart of Accounts and look for an account with a "Type" of Cost of Goods Sold. If one exists, you are all set. You can have multiple COGS accounts if need be.

If you need to create a COGS account, from the Chart of Accounts window, click Account | New, and select the account type of COGS. You may find this account type under "Other Account Types." Click Continue, enter the information in the "Add New Account" window, and click Save & Close.

Using COGS in Transactions

Remember that COGS are things that you are paying for. When entering transactions into your accounting software, you may select a COGS account directly, or select an Item that points to a COGS account.

When you enter a bill, credit card payment, or write a check in Quickbooks, you must select the "Expenses" tab or the “Items” tab on the input window. Select the Expenses tab if you wish to debit a COGS account directly (don't be confused by the fact that the tab is labeled "Expenses"). Select the Items tab if you want to choose an Item you've created that is associated with a COGS account. In either case, the COGS account will be debited. For help with entering transactions, see our popular tutorial Super Sample Accounting Transactions

Creating an COGS Item for a Customer Job

In Quickbooks 2006 and newer versions, there is a check box on the "New Item" or "Edit Item" window that says, “This item is used in assemblies or is purchased for a specific customer job.” When checked, the window expands to include additional fields, and prompts for an Income Account and an Expense Account (choose the COGS account here). When you enter a bill, credit card payment, or write a check, select this Item.

When you create the invoice for that particular customer job, click the "Time/Costs" or "Add Time/Costs" icon. The product you purchased for the job should be listed on the "Items" tab of the popup window. Select it.

This is a nice QuickBooks feature, but is somewhat completed. We suggest you create a sample QuickBooks company and test these types of features before using them in production mode.

We hope this article has been helpful. Cheers!

Disclaimer:: Keynote Support is providing general information in a highly readable format as a service to the visitor. We have made every effort to provide information accurate as to the date of this article. Every customer environment and each transaction is unique, so please use the information and examples in this article only as a guide. In addition, the reader cannot infer from this article that Keynote Support is providing financial or accounting advice. Consult with a financial or accounting professional for assistance with your unique requirements.

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