Accounting: Understanding and Using Items and COGS
This Accounting Basics tutorial defines Items and COGS, and discusses the use of Items and COGS in Intuit's QuickBooks Pro accounting software. Learn what Items and COGS are, how to use Items with invoices and COGS.
We also discuss other topics, such as how many items you need, how to create a COGS account in QuickBooks, how to create a COGS item for a customer job, and what the difference are between Items and Expenses. We'll begin by defining what "Items" are.
What are QuickBook Items?
For most users, QuickBooks "Items" can be defined as "categories" or "types" of products and services sold. Items are required and are used when creating invoices, sales receipt, refunds, and credit memos. Sub-items may also be created.
Each item is linked to an account - usually a revenue account. Multiple items may be associated with the same account. In fact, some businesses may have hundreds of items per each revenue account.
If a business collects sales tax, separate items must be created for each city and state in which the company sells products.
Business owners can track the performance of items and subitems via the QuickBooks' "Sales by Item Summary" and "Sales by Item Detail" reports.
How Many Items Do I Need?
A business selling a large amount of products may wish to create an Item for each product type and subitems to further break down the product list. For instance, a hardware store could create items for product categories, such as plumbing, electrical, and housewares; and then create subitems to further break down the types of products sold. An item can, if desired, be created for each individual product and the product's price can be specified.
Some companies will have items for both services and products, such as a landscaping company, and many small businesses, such as consultants, may have one revenue account and only a few items.
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.
How is an Item Created?
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. Note: some versions of QuickBooks may be slightly different.)
Then, for each Item, choose the account to which it will be linked. As you can see in the "New Item" window, you can create Subitems, and you can enter the price of an item.
If you like video instruction, check out Learning QuickBooks 2013 and watch their free chapters on Adding Items for Services and Adding Items for Sales Tax.
Items and Invoices
Items are required when creating an invoice in QuickBooks. Each invoice contains a column called Item, or Item Code, or Classification - depending on your version of QuickBooks. 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 (if using the Accrual accounting method). When the invoice is paid, Accounts Receivable is credited and Cash (checking account) is debited.
Accounts versus Items
Separate revenue accounts could be created for each type of product or service, but that would be highly unadvisable! Create only as many income accounts as you want reported on the Profit and Loss Report, and use ITEMS to track the performance of the products and services you are selling ... items are required anyway! The Chart of Accounts should be kept as lean as possible.
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 tutorial only touches upon Inventory briefly, but we want to stress that setting up and using inventory in QuickBooks is not a simple process. We first suggest that you create a sample QuickBooks company upon which to test before you go "live." Second, we suggest that you get training in QuickBooks and perhaps also in Accounting basics. QuickBooks 2014: The Missing Manual (the official Intuit guide) has a chapter devoted to setting up inventory items and managing inventory.
QuickBooks 2013 In Depth has a chapter on Setting Up Inventory (which includes a section on Proper Inventory Processes) and a chapter on Managing Inventory. And QuickBooks 2014 In Depth is available April 10th and can be pre-order now.
Video instruction is also available. The course mentioned earlier, Learning QuickBooks 2013, has two chapters on setting up and managing inventory. In addition, Intuit has a user forum where other forum members will answer submitted questions.
We hope this article has been helpful. Cheers!
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- » ACCOUNTING OVERVIEW: Chart of Accounts, Double-Entry Bookkeeping, General Ledger, and Account Types
- » MAKING SENSE OF DEBITS AND CREDITS
- » SUPER SAMPLE ACCOUNTING TRANSACTIONS
- » THE ACCOUNT TYPES: Assets, Liabilities, Equity, Revenue, and Expenses
- » ACCOUNTING REPORTS: The Income Statement and Balance Sheet
- » USING ITEMS AND COGS IN ACCOUNTING
- » DEFINITIONS: Accounting - Bookkeeping Terms A-C
- » DEFINITIONS: Accounting - Bookkeeping Terms D-L
- » DEFINITIONS: Accounting - Bookkeeping Terms M-Z
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