QuickBooks 2005: The Missing Manual

Should You Track Inventory with Items?

If your business is based solely on selling services, you can skip this section entirely. But if you sell products at all, you can handle them in two ways: by stocking and tracking inventory or by buying and reselling it on a customer-by-customer basis. The system you use affects the types of items you create in QuickBooks. When you use QuickBooks' inventory feature, the program keeps track of how many products you have on hand as you purchase and sell them to customers. When you purchase products specifically for customers, you still need items, but there's no need to track the quantity on hand. In this case, you can create non-inventory part items, which you'll learn more about shortly.

For example, general contractors rarely work on the same type of project twice, so they usually purchase the materials they need for a job and charge the customer for those materials. Because general contractors don't keep materials in stock, they don't have to track inventory and can use Non-inventory Part items. On the other hand, specialized contractors such as plumbers install the same kinds of pipes and fittings over and over. These contractors often purchase parts and store them in a warehouse, selling them to their customers as they perform jobs. These warehoused parts should be set up as Inventory Part items in QuickBooks.

Tracking inventory requires more effort than buying just the materials you need. Use the following questions to determine whether or not your business should track inventory:

• Do you keep products in stock to resell to customers? If your company stocks faux pony bar stools to resell to customers, those bar stools are inventory. By tracking inventory, you know how many units you have on hand, how much they're worth, and how much money you made on the ones you sold.

  The faux pony mouse pads you keep in the storage closet for your employees are business supplies. Most companies don't want the overhead of tracking inventory for supplies they consume in the course of business.

• Do you want to know when to reorder products so you don't run out? If you sell the same items over and over, keeping your shelves stocked means more sales. QuickBooks can remind you when it's time to reorder a product.

• Do you purchase products specifically for jobs or customers? If you special order products for customers or purchase products for a specific job, you don't need to track inventory. After you deliver the special order or complete the job, your customer has taken and paid for products and you must account only for the income and expense you incurred.

Your business model might dictate that you track inventory. However, QuickBooks' inventory-tracking feature has some limitations. For example, it lets you store up to 14,500 items, and then you're stuck. If you answer yes to any of the following questions, QuickBooks isn't the program to use to handle the products you sell:

• Do you sell products that are unique? In the business world, tracking inventory is meant for businesses that sell commodity products, such as electronic equipment, and stock numerous units of each product. If you sell unique items, such as fine art or compromising Polaroid photos, you'd eventually use up the 14,500 items that QuickBooks can store. For unique items, consider using a spreadsheet to track the products you have on hand. When you sell your unique handicrafts, you can record your sales in QuickBooks using items that aren't unique. For example, use an item called Oil Painting on the sales receipts for the oils you sell.

• Do you manufacture the products you sell out of raw materials? QuickBooks inventory can't follow materials as they wend through a manufacturing process, or track inventory in various stages of completion.

Note

QuickBooks Premier and Enterprise editions can track inventory for products that require light assembly. For instance, if you create Wines from Around the World gift baskets using the wine bottles in your store, you can build an Inventory Assembly item out of wine and basket Inventory items.

• Do you sell on consignment or rent your inventory? When you sell on consignment, you don't purchase the products you sell. If you want to keep track of your consignment items, create a separate spreadsheet or database. Similarly, if you rent or lease your inventory, you receive income for not selling your products. In this case, you can show the value of your inventory as an asset in QuickBooks, but you don't need Inventory items, because the number of items you have on hand doesn't change very often.

• Do you value your inventory by a method other than average cost? QuickBooks calculates inventory value by average cost. If you want to use other methods, like last in, first out (LIFO) or first in, first out (FIFO), you can export inventory data to a spreadsheet and calculate inventory cost outside of QuickBooks (page 518).

• Do you use a point-of-sale system to track inventory? Point-of-sale inventory systems blow QuickBooks inventory tracking out of the water. If you use one of these systems, forego QuickBooks' inventory feature. You can periodically update your QuickBooks file with the value of your inventory from the point-of-sale system.

Tip

You can still use QuickBooks, even if you are less than impressed by its inventory capabilities. For example, if you perform light manufacturing, you can track the value of your manufactured inventory in a database or other program. Periodically, you can add journal entries to QuickBooks to show the value of in-progress and completed inventory.