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Quickbooks Inventory Short-Comings

An out of the box version of QuickBooks includes an inventory management module.  The module allows you to create inventory items for purchased goods.  You can either sell those items directly, or make sub-assemblies and finished goods from them.  QuickBooks’ inventory module is a very affordable solution for a small business to have an inventory management system that interfaces directly with the company’s general ledger and keeps perpetual inventory records, which are typically only available to larger companies with expensive accounting systems. Consistent with the adage “you get what you pay for”, QuickBooks’ inventory module has some short-comings that you should be aware of. They are as follows:

• Unlike the QuickBooks reports for accounts receivable and accounts payable, the inventory valuation reports can be different from the inventory general ledger account balance.  This is possible because a user can directly debit or credit the inventory account balance without associating the entry to an inventory item (unlike accounts receivable where the system requires the user to associate a name with any entry to the accounts receivable general ledger account). 

• QuickBooks allows you to create inventory assemblies using other inventory items. It does not allow you to easily capitalize the cost of labor and overhead into the new assembly. This is problematic for anyone attempting to keep their books on a GAAP basis. You can work around this issue with a little ingenuity, but QuickBooks does not provide a simple solution for capitalizing labor and overhead.

• The cost of each item sold can only be charged to one cost of goods sold account, even if the item is an assembly of multiple items.  This can be bothersome in a situation like the following example.  If your company builds a widget and then packages the widget in a special case, you will probably want to separate the cost of the widget and the cost of the case in your statement of income. If you have assembled the widget and the case into one item in QuickBooks, the cost of both will be charged to the same cost of goods sold account. 
• QuickBooks inventory uses the average cost method to record cost of goods sold for each sale and to value the inventory on the balance sheet. According to a report published by the AICPA in 2009, only 22% of companies in the U.S. use the average cost method. Most companies use the first-in first-out method.  Note that QuickBooks Enterprise has the option of upgrading to the Advanced Inventory module which has many more options, including a first-in first-out option. Keep in mind that this upgrade is more expensive than the program itself.

QuickBooks inventory provides the user with a lot of great information for a great price. Knowing its short-comings will help you make the best decisions regarding your inventory tracking.

Rex Platt, CPA