When Things Don't Look Right in Cost of Goods Sold, Check Your Inventory
The first place to look in defining a problem with cost of goods sold is the inventory account. If the client has confidence they are paying suppliers correctly, there are only two likely places for the vendor bills to be posted, inventory or cost of goods sold. If one account is off, the other is likely to be off by the same amount.
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PrintI have been working with an office supply house whose QuickBooks balance for cost of goods sold is exceeds the amount reported in their point of sale application by over $100,000. The point of sale application is posting the COGS transactions to QuickBooks for all sales from inventory but passes purchase orders to QuickBooks for both inventory purchases and non-inventory sales.
The first place to look in defining a problem with cost of goods sold is the inventory account. If the client has confidence they are paying suppliers correctly, there are only two likely places for the vendor bills to be posted, inventory or cost of goods sold. If one account is off, the other is likely to be off by the same amount.
That seems to be the current issue since our financials indicate a negative inventory balance. The problem is to identify where things are going awry. I’m still searching for the “smoking gun” but I’ll continue this post with my findings. Here’s the situation.
The point of sale application is robust and does an excellent job of meeting the needs of a high transaction volume business. Here’s how the it works. Items sold to customers can be drawn from inventory or special ordered
When items are sold from inventory, the POS passes QuickBooks the following entry
|
|
Dr |
Cr |
|
Accounts Receivable |
xxxx |
|
|
Sales |
|
xxxx |
|
Cost of Goods Sold |
xxxx |
|
|
Inventory |
|
xxxx |
I was able to tie these entries to a POS report.
When an item is special ordered, the POS passes QuickBooks the following entry
|
|
Dr |
Cr |
|
Accounts Receivable |
xxxx |
|
|
Sales |
|
xxxx |
Again, I was able to validate these transactions between QuickBooks and the POS system.
The problem seems to be on the purchasing side for both inventory and non-inventory items. It appears we have a glitch where inventory purchases are going to cost of goods sold. Again, the POS is supposed to be handling this process. Here’s how…
The POS system passes purchase orders to QuickBooks and each purchase order contains a list of items purchased. As expected, for each item, there is an item code, description, quantity, and amount. The same PO can have both inventory purchases and special order items.
Inventory purchases are assigned an inventory item code. Special order items are assigned a single item code which is pointed to the cost of goods sold account. The warehouse staff supplies accounting with a list of received items by PO. Accounting opens “receive inventory without a bill’, selects the appropriate PO, and selects the items reported to have been received.
When accounts payable receives a supplier bill, they look for item receipts under that vendor and PO in the Vendor Center. Hmmm... I wonder what the A/P clerk does when all items on a vendor bill have not been received. I need to pursue that one. To be continued…
Robert Guild is certified QuickBooks ProAdvisor in Austin, TX who conducts CPE courses for CPAs and individual training and group classes to QuickBooks users. His company at www.QBCoach.biz, maintains a sixteen-station QuickBooks lab, providing hands-on training. You can contact him directly at rguild@QBCoach.biz or follow him on twitter at QBPro
