If you are tracking inventory in QuickBooks, you need to understand how QuickBooks tracks inventory assets, average cost and the Cost of Goods Sold (COGS).
When you set up your first inventory item in your Inventory List, QuickBooks automatically adds two accounts to your company data file's chart of accounts:
In addition, each inventory item requires an income account. You are not required to use either of the automatically set up accounts. You can set up your own accounts or subaccounts.
Note: If either of these account numbers is already in use, QuickBooks will assign the next available number to the new accounts.
When you purchase an inventory item, your Bill, Check or Credit Card Charge will debit the Item's Inventory Asset account and credit you A/P, bank or credit card account. It is not debited to an expense account because (1) it is an asset that you can sell for future benefit and (2) you record the expense to match the income.
The best way to track your inventory purchases is to run the Inventory Valuation Summary / Detail reports for all dates.
Normally, inventory COGS is affected only when you sell inventory items on invoices or sales receipts. When you sell an inventory item, run the Transaction Journal Report for the invoice/sales receipt and you see the Sales/Accounts Receivable transaction and you will see the Inventory/COGS transactions which credits the Inventory Asset account and debits the COGS accounts.
However, if you sell inventory that you do not have, you can force subsequent bills, checks or credit card charges to adjust the Inventory Asset account and the COGS account. The amount on each side of the Inventory/COGS transaction is:
Number of Items Sold times Average Cost of Item
QuickBooks uses the weighted average cost to determine the value of your inventory and the amount debited to COGS when you sell inventory. The average cost is the sum of the cost of all of the items in inventory divided by the number of items.
If you have any questions about an average cost, your best course of action is to: