Understanding QuickBooks Inventory Cost

Written by Charlie Russell

If you are using QuickBooks to manage your inventory, you need to understand how QuickBooks deals with the cost of inventory items. I’ve been answering a lot of questions about this in the Intuit Community Forums lately, so here is a quick rundown of how things work.

Cost Fields in QuickBooks

If you look at an Inventory Part item, you will see that there are two cost fields.

QuickBooks Cost

The cost field, on the left, is a “reference” field. That is, it doesn’t have any direct bearing on the valuation of your inventory, the cost of your inventory in your inventory asset account. I wish they had another name, because it is confusing to talk about it. I refer to this as the “last purchased cost”, although that isn’t always exactly right.  If you purchase an item and receive a bill for it, the cost that you receive the item at will usually be stored here (but not always, that depends on how your company file is set up). You can edit this cost directly in this window, it doesn’t have a direct effect on your inventory valuation.

The avg cost field, bottom center, is the field that is used in the calculation of the value of your inventory. This is calculated by QuickBooks based on the cost of receipt (and adjustment) transactions. You cannot directly edit this in the window here.

Inventory Valuation

QuickBooks values your inventory using an average costing calculation, as opposed to other types you may be familiar with, such as LIFO, FIFO, or specific costing. If you need another costing method, you will have to use a third party addon program that manages inventory outside of QuickBooks.

This can be a complicated subject – I am only going to go into this lightly. Let’s look at a simple example.

  • If start with an item with no quantity, no value, and receive a quantity of 10 at $1.00 each, you will see that the cost is $1.00, and the avg cost is also $1.00. You have $10.00 of inventory in your inventory asset account.
  • If I then receive another 10 items, but at a unit cost of $2.00, you will usually see the cost value set to be $2.00. However, the avg cost of your inventory will show as $1.50. We started with 10 items and a value of $10.00, we added another 10 items at a value of $20.00, so we have 20 items with a value of $30.00. That gives us an average cost of $1.50.

If you sell one of these items in an invoice, the COGS account is incremented by the average cost of the item at the time of the sale.

This is a simple example. There are long arguments about the costing calculation that QuickBooks uses – relating to the more complicated situations when you have many added transactions, and other complicated situations.

One thing that I will note, briefly – if you sell all your inventory, and then continue to sell the item so that you go to a negative quantity, the costing calculation runs into problems. It can’t accurately account for a negative balance, and you can see some very odd figures show up in the average cost field, and your inventory valuation reports. Once you bring the balances back to positive these figures should resolve themselves, but it is always a good idea to not allow inventory balances to go negative.

Manufacturing Cost

When you are working with an Inventory Assembly item you have an additional cost field – the Total Bill of Materials Cost. See my article on Understanding the Total Bill Of Materials Cost.

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About the author

Charlie Russell

Charlie Russell has been involved with the small business software industry since the mid 70's, and remembers releasing his first commercial accounting software product when you had an 8-bit microcomputer with one 8 inch floppy disk drive. He has a special interest in inventory and manufacturing software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor with additional certifications for QuickBooks Online and QuickBooks Enterprise, as well as being a Xero Certified Partner. Charlie started blogging about QuickBooks in 2008 (Practical QuickBooks) and has been the managing editor and primary writer for the Sleeter Report since 2011. Charlie can be reached at charlie@ccrsoftware.com

Visit his CCRSoftware web site for information about his QuickBooks add-on products. He is also the author of the California Wildflower Hikes blog.


  • Thanks for explaining how to use QuickBooks to manage inventory.I haven’t been able to find other information on the web that is as comprehensive as this explanation.

  • I am helping a friend in the wholesale fish businss setup his QB items. He buys whole fish and sells as both whole and fillets. How do you account for the loss in yield when purchasing a whole fish item that will be sold in fillets with say a 30% loss in yield. How do you set up an item that is purchased as a whole but sold both ways.


    • John, there are a whole bunch of issues here that can’t easily be addressed in a blog comment. And many ways of dealing with them that depends on a number of factors you haven’t expressed.

      You could, for example, have inventory assembly items for the fillets, and “process” them by building them. But that may be more work than needed.

      You could just not have these be inventory part items, since they would not be held in “inventory” for long, and just handle the purchases as expenses and the sales as income, and work out profitability in the financial statements. Some pluses to that, some negatives.

      It depends on what you are trying to get out of the system, what your financial requirements are, and how much work you want to put into running the program.

      And we won’t even start to talk about the whole “catch weight” issue, which is a major thorn in this kind of business process.

  • John, I have a w/ avg cost issue that I cannot seem to resolve. I keep all my avg costs @ $0 as I do not keep an inventory in QB. So all of my items have negative inventory balance. This has been working. Unfortunately I created a couple of items with avg cost amts and now I have a neg balance on my balance sheet in the Inventory Asset acct. I would like to set the avg cost to these items to $0 to avoid the implications to the Inv Asset acct. Suggestions on how to do this? I generally create new items off the item list. Initial purchase transactions do not exist for these items. So I am not sure where the avg cost amt came from. Thanks.

    • Greg, why do you use “inventory part” items if you are not keeping inventory? It sounds like you are creating a lot of work for yourself – why not just use “non-inventory parts”?

      If you entered a quantity for the item when you created the new item, that creates a receipt and it will use the “cost” value that you enter at that time…

  • Charlie, so now that I understand it. How do I correct it? My averages were way off…which appears to effect net income reports, customer income summary reports, etc. I went in to inventory adjustment values and “adjusted” the values back to what they should be…then chose inventory asset as the account to log the adjustment (instead of an expense account which would incorrectly change net income). Assuming that this was what I should have done (which I doubt), I then go back and I still have customer income showing negative numbers (which was the result of average cost being high and out of line). My little adjustment didn’t seem to carry back into history… not sure how to make that adjustment so that I can accurately show income/loss. Thanks in advance for any light you can shed here.

    • Kevin: Fixing this kind of thing is something that is really difficult to help you with through blog comments. There are many variables here, and without actually seeing what you have done in the past, and what you have changed, I can’t really give you good advice here. I strongly recommend that you work with a local advisor who can look at your files and give you sound advice based on what they see. You can find a Sleeter-Certified consultant by using the search box at the top of the right hand column here.

      Inventory adjustments have a date, and the date is when the changes take effect. If you entered the current date, that might not fix historical problems correctly.

      In many cases, depending on what the original problem was, you may be better off changing the original adjustments rather than posting new adjustments. However, that isn’t always the best approach, depending on the volume of posts AND the timeframe you are working with.

      Posting to inventory asset is usually not a good thing to do, it creates other issues that you may have problems with.

      In any case, this is a situation where you need to work with a consultant who can straighten things out for you. Someone with the Accountant’s Edition (and who knows how to use it) will have additional tools that can help straighten out inventory issues.

  • Hi there,

    I hope you can help me. I’m busy with financial year end and the accountants are querying the stock. My Stock Asset account and my Stock Valuation Report differs. I’ve check that all the items are set up correctly ie Asset Account is Stock Acc and COGS account. Any idea why these two will be different?

  • Hi Charlie,

    It seems I may have caused QB to double count my COGS. For example, on my PnL, COGS for a product states $27,000. When I double click that number, the Transaction Detail By Account report comes up. In that report there are Invoices and Bills. I dont believe there should be bills in there…? Reason being, when we charge a customer in an invoice, it is taken out of COGS automoatically based on the average cost. Ok makes sense. But, why would it also show the bill to that vendor?

    I do create PO’s and receive items & enter bills against them.

    I asked my accountant and she is stumped. So am I. Please help


    • Erin, I can’t say anything for sure without looking at your files. My recommendation would be to find an experienced QuickBooks consultant who can help – there are many simple things that can be checked for, and a ProAdvisor would have tools that you might not have available to you. If you use the “find a consultant” widget in the upper right column of this page you can find a qualified person in your area who could help. The first thing I would look at would be to see what “type” of items you have. For instance, if you have “non-inventory items” and are purchasing them, you need to have them set up as “double sided” items. In any case, lots of reasons why things would show this way, and a quallified person would most likely be able to pin this down quickly once they have access to your files.

  • Greetings, I just started a job and have come across an entry that the previous staff were doing to COGS sold. Me and the office manager have went through all of this and it doesn’t really make sense to us. We came across your blog and we are hoping that you can help!! I have already read all the information posted on inventory costing. The reports I have printed are the detail to the material account. This is how the journal appears.
    DR A/R
    CR Inventory
    DR Materials for inventory cost
    CR Materials for the sale price

    How does the variance of the inventory cost and the inventory sale price hit income?

    The previous person that was in this job did a journal entry monthly and did the following entry.

    DR Materials for the net of cost and sales price
    CR Income for the net of the cost and sales price

    Sorry for the length of this, but we are baffled as to why this entry would have been made at all.

    Thank you for your time!

  • Nicole, I’m not an accountant or bookkeeper, so I generally stay away from commenting on that kind of thing. And “forensic bookkeeping” is another thing altogether. My only comment here would be to say that if your system is set up properly AND you were using all of the features provided in QuickBooks, there typically is no need for regular adjustments like that. My recommendation is to work with a consultant who understands QuickBooks very well, and who has accountant/bookkeeping resources available. You can use the “find a consultant” link at the upper right of this page.

  • how can we block the issuing invoice to customers when the stock quantity falls short, the negative quantity will mess up our COGS.

    • Short answer on that one, Lisa – “you can’t”. QuickBooks doesn’t have a way to put a hard limit on this. You just have to heed the warnings when it tells you that you don’t have enough items on hand.

  • Is there a resource that you know of that explains in detail how to adjust accounts receivable to cash basis when inventory assets are booked?

  • Ok here is my situation, I import goods, so my inventory cost includes duties and taxes. My problem is how do I put all these cost in my inventory without having to entering all these invoices into inventory which will overstate my inventory?

      • Mohammad, I’m not sure what exactly you are asking. What kind of “items” are these (inventory part, non-inventory part, etc)? How long ago did you receive them? What exactly is the problem – did you enter the incorrect cost of the item? If you just recently entered an item receipt and just entered the wrong cost, you can easily go back to the transaction and change it to enter the correct cost.

  • Hi

    i have a problem i want to make an accountant copy to my accountant to use but i don’t want him to see the cost of items i bought , the only thing i want him to do is issue invoices and collect money , is there a way to prevent him from seeing the cost of items in inventory other reports

    • Abdulaziz, the intent of the Accountant’s Copy is to give a FULL copy of your file to the accountant. So you won’t use that feature for what you are looking for. Also, unfortunately, in QuickBooks, if someone can sell an item they can also see the cost of the item, there isn’t a way to separate those functions with just QuickBooks by itself. You would have to go to some third party software solution that would work with QB.

  • Charlie,

    I have a relatively simple question about average COGS. Do you know if the average COGS in QB is calculated on a time period basis, and what that basis is? I have inventory items which we previously paid for but are now free and I’d like to know if in the next fiscal year the avg cost for that item will go down to zero.

  • Kathy, it is essentially the ENTIRE history of the item. So it would depend on how your balances run. So if you buy some, sell some, buy some more, sell some more, the average cost fluctuates. However, if you sell out ALL of the items, so you have a zero balance on hand, and then buy some more, the average cost will be based just on those latest purchases. It is like you started all over, essentially, from that point.

  • Hi Charlie,

    I bought a business with existing inventory 3 years ago. When my Quickbooks advisors set up my account, she didn’t enter the inventory I purchased as inventory so I have “negative” inventory. I need to print an accurate balance sheet. How do I correct this inventory issue without increasing my expenses?


  • hey charlie,
    i have no stock option in my item list and am therefore unable to add stock only non stock or services…
    could you tell me the cause for this???

    • James, I’m guessing that you are using the UK version, so things are a bit different there than in the US version I work with.

      However, I suspect that you haven’t enabled inventory. In the US version you would select “Edit” then “Preferences” and select the “Items & Inventory” option on the left. In the “Company Preferences” tab you would check the box “Inventory and purchase orders are active”, and then you’ll see inventory part items being available as an item type.

  • Charlie,
    We carry inventory by sku purchased at various costs from different vendors. We have found that our COGS Expense & Inventory Asset balances are changing after the period has closed. The Trial Balance debit & credit totals remain the same, but the individual account balances changed by the same offsetting amounts. I’ve run audit reports, but I cannot see any adjustments, the original documents are actually changing, I assume because of the average costing issues mentioned above. Is this “normal” for Quickbooks, to change closed periods?
    Thank you.

    • Debbie, the first thing to consider is if you ever allow your quantity on hand to go negative. If you have a negative quantity on hand at some point then odd things happen with COGS, because QuickBooks doesn’t have a good way of calculating an average cost for a negative quantity. You get one calculated COGS value when inventory goes negative, and later on if you bring the quantity back to zero or positive, QuickBooks will adjust COGS for this. How it adjusts it depends on several factors. But that is the first thing to look for.

      After that, you look for situations where someone is changing a date on a receipt or adjustment, or going back to change a quantity, or something of that order.

  • we are using qb and we are buying parts under one part # and sellig them under another. Would building an assembly for these parts be the correct way to do this?

    • Maybe, maybe not. Why different part numbers? And are you doing some sort of processing to them?

      If you are just buying with one number and selling under another, with no processing or “manufacturing” going on, then I would consider using a “Group” item instead. That is just like an alias or alternate name, no “building” or other processing needed. But the best answer does require some more information about your business and what you are doing, and how many items you have, etc.

  • Is there a report that I can run which will determine my COGS for the previous period (month)? Although I can determine the sales each day or month, I can’t find where I can show my COGS to help determine our monthly profit/loss. I did find where I can show my inventory valuation at a specific day/date but with the selling of inventory as well as the replenishment of same that number does not help. Thanks so much!

    • Karen, have you double clicked on the “Cost of Goods Sold” account in your chart of accounts? Assuming that is what you are using for COGS for all items. That would open the QuickReport, and you can set a date range there…

  • Hi, can you tell me what the best way is to track inventory when we send out samples that may or may not be invoiced at a later time. Some times the item is not invoiced until sixty days later if the customer likes it. Other times we get the item back and it goes back into inventory. We dont want to mess up the cogs by invoiving if it’s not a complete sale but we also want to be able to track how much stock we have to complete other job while we have samples out. I hope that makes sense.

    • There are several ways to deal with this, but it does depend on what QuickBooks version you have.

      If you have Enterprise with Advanced Inventory then you can make a “site” for each of the locations you send things out to. Or, if there are a lot of sites, just create a site for all samples out.

      If you have Premier then one way is to use sales orders. Create a sales order for the place that the samples go out to. They are “allocated” but not sold, so this doesn’t affect your COGS or financials. If they are returned, delete them from the sales order. If they are sold, use the sales order to invoice function to sell them.

  • Hi, Thank You, This is helpful information.

    I’ve few questions here which average cost method QuickBook use, Weighted Average OR Moving-Average? Is there any way we choose one from these two ? And which one would you think is more commonly use/accurate?

    • Khurram, I’m not sure how you want to distinguish “weighted average” from “moving average”. Different people will define those in different ways. However, you can’t change how QuickBooks does it’s calculations. There aren’t any choices. EXCEPT if you want to move to Entprise and use the Advanced Inventory feature (which is an additional fee) and then you have an option for FIFO costing.

  • I have a client who uses QuickBooks Enterprise Solutions 2011. They currently caring inventory, and are tracking inventory in QBs; however, they are not actively using inventory. Meaning that they are purchasing items and posting them to the Inventory Asset account, but they are not removing the items from inventory when they are used in the manufacture of a product. In addition, because the parts are not being pulled from inventory in QBs and thus charged to the job, the PNL per job do not show the accurate COGS. I have suggested that they change each inventory item “Inventory Information” field “Asset Account” from “Inventory Asset” to “COGS:Materials” so that the Job Costs are tracked properly. They are concerned that if we do that, all historical data purchase under that part would also be moved to the COGS account. They have already created an AJE to move the 2011 and prior Asset Inventory used to COGS. So if we change the account at this point will it only change any new items we enter or will it change all parts ordered under that part number? Please advise. Thank you.

    • Katrina, that is more complicated than I really should go into in a blog comment like this.

      Changing the asset account WILL affect existing transactions, so that probabl isn’t what you wan tto do.

      There are all kinds of things going on here – the best idea may be to see if you can get them to use proper procedures as they move forward. If they are using “inventory parts” but not consuming them, the quantity is building up and that means it is worthless to do that work. Get them to “build” the items to pull the components properly. Or if it makes sense in this situation, create new items that are “non inventory” parts so that you don’t have to worry about quantities and such.

  • Charlie,

    Thanks for your time and great replies, Need some problem solving.

    I just ran a report as to see my profit on some sales I did, and realized that some items I make 100% profit, when I went in to those Items the cost is filled up, but the avg. cost is empty, after reading some help and the community I realized that the report derives the information from the avg. cost field is there any way I can modify that field so my Profit and income are accurate ?

    Thanks for your time and appreciate your help


    • Joseph, it is hard to give a specific answer without having hands on the file. If you are using inventory parts, and your average cost is zero, then you aren’t handling the purchase/receipts transactions correctly. That is where the average cost will normally come from. I can’t tell you how to fix that going backwards without knowing how long you have been using the system. Moving forward, you need to fix your processes so that these values are being captured correctly.

  • Hi Charlie,

    I have item X cost 2 USD – sometime my salesman is sell it at 1 Usd ( negative margin ), so i check that every end of month but too late.

    Please any way to block the sales of any items sell it ( UNDER – COST )


  • Hi Charlie,

    I am looking at my company file that has has been selling invertory and not booking any receipt of items. All the inventory is current showing negative balances. In the P&L the COGS is 4 time the sales figure. I am trying to record the receipt of itmes for the first time. I am not an account so forgive if I am using the wrong wording.
    If I record all my billes for inventory purchased, would this fix the problem in the P&L?
    If that wont work, do I need to recreat the inventory items so that a more accurate average cost figure would affect the P&L and BS?
    How do I fix my problem?

    • Barry, it is hard to give a specific answer without seeing your file, and knowing a lot more about your situation. In a very general sense, if you went back and entered all the purchases/receipts, that should resolve things. However, it does depend on how long a time this has been going on, how much work that entails, what you did as far as entering the expenditures for those item purchases (assuming you have been entering the checks you wrote?), and more. You may want to work with a qualified consultant who can look at your situation and work out a plan with you. And, then, you have to work out a solution that will keep this from happening again as you move forward.

  • Charlie –
    I am having the same inventory problem with a client as Barry is having.
    Their system was set up before I got to them, and we have been trying to make it work for the purposes they need. They mainly wanted to be sure that everything (office furniture) that they were buying was getting invoiced when sold so that nothing was falling thru the cracks. These were big items and were only supposed to be used once – from PO to bill to invoice everything was supposed to flow through the system. Then things got crazy and the items were being re-used without being “purchased” back into stock. QB was average costing and then the P&L looked like Barry’s. I noticed in the item listing that I had some negative “quantities on hand” since we were selling and not purchasing, so I did an inventory adjustment to COGS as a test and zeroed out those negatives on the items that I knew were complete. Will this give a more accurate reading in the COGS on the P&L?

    • Cheryl, hard to say without having hands on the file. COGS postings going forward are going to be based on the average cost you have for the items at the time of the sale. If you did just a “quantity” adjustment, that doesn’t change the average cost, and I can’t tell if the average cost going forward is going to be accurate or not. If you did a “quantity and value” adjustment, then you have reset the average cost to some value – if that is a correct value, then you are OK going forward (but I can’t tell if your COGS valuation will be right in the past). There are a bunch of things interacting here so it is not possible for me to say if you have it set up right or not.

      And, going forward, it is only accurate if the client changes their ways and moves materials through the system correctly. If they continue to make the same mistakes as before, the problem comes back.

  • Is there anyway for it to stop using and average cost. I would like to adjust manually on a monthly basis per the inventory count.

    • Tanner, QuickBooks is an average cost system, you can’t change that in most cases. The only alternative costing method is FIFO if you are using Enterprise 12 and purchase the Advanced Inventory option.

      Alternately, you can purchase one of the add-on inventory systems that takes inventory out of QB and just uses it for financials. But that is expensive, and I don’t know if you will get what you want from one of those.

      You can turn your items into non-inventory items and then just use journal entries to adjust your financials. But you lose the ability to track balances on hand (etc), and this creates a lot of extra work. Usually not the best way to go.

      You can just make monthly Value adjustments to set the inventory value to what you want, but that might not be the correct thing to do financially. Best to talk this over with a financial advisor who also understands QuickBooks.

  • Hi Charlie,
    Am I correct in understanding that if an Item qty never goes back to zero, then the average cost will be the average cost of the Item since the transactions started occuring in that item? e.g. an Item was first used in 2005 and has been used continually without having a zero (0) quantity, then the average cost will be the average of ALL transactions since 2005?? As opposed to the actual average cost of the current stock on hand qty which may have only been received in the last month with all previous stock being sold/used, etc.?

  • Hi Sir,
    I have one question, for one of our client they took laon from their relative for the business,they have not show in the books. But the repayment is making through business. So now this loan account is showing debits balance. can you please advice how solve this issue.

    Second Question is – One of our client having retail business but in the books they have not recorded the purchase entry, but the inventory is directly updated to the opening stock. Some of the purchase made this year and those are also updated in the opening stock.So can you advice me how to adjust purchases for this year.

    • Shivakumar, my apologies, I don’t comment on that kind of accounting issue in blog comments (the loan issue). That is an issue for an accounting professional.

      For inventory, I’m not clear what you mean by “the inventory is directly updated to the opening stock”. Are you saying that you are entering the balance on hand when you add an item to the item list? If so, that isn’t usually the best way to do it. You should always try to use item receipts (or checks, or credit card purchases) and not enter the value through the “Add Item” window. When you do it through “add item” you have a posting to “opening balance equity”, and then you have to make a journal entry to distribute that to the right place.

  • Hi, On the P&L the GOGS are being duplicated. When I go to the detail the customer invoice cost as well as the supplier invoice coist are being calculated. When payment to suppliers are made it’s being done through the cheque payment function under COGS. Please help as this is giving me the wrong P&L profit/loss.


    • Marius, it is hard to give you an answer without being able to see your QB file. It sounds to me like you don’t have the proper accounts set up for the inventory items (assuming that these invoices are for “inventory part” items). What accounts do you have set up for the three accounts in the inventory parts?

  • firstly, thx for this valuable informations. but i cant get it , i mean the average cost …. lets say that we will setup anew inventory part and we will put in cost window its first cost price right (1) dollar for example, what will happend when i 2ndly purchases with (2)dollar price .. i mean it will be done automaticly ???

  • Hi Charlie,
    I’m setting up QB in a very basic way for the first time in our business and am in the process of entering 11 months of historical data for 2012. I’m using the register to just enter a single aggregate entry for each of my expense and income categories for each month into a dummy bank-type account that I set up specifically for this purpose – to capture all of my transactions regardless of which of my credit cards or checkbooks I used to pay.

    I have about 20 expense categories like, Advertising, Freight-In, Rent, Office Expense, and my income category of Sales and I’m adding up all my expenditures for each category and entering it as a single transaction – just so I can get some data into the system.

    My problem is with CoGS and Inventory. I do not want to use QB to track my myriad individual stocked items – I don’t have time to enter all that data. I just want to be able to know the total dollar value of my inventory based on the $ I spend to buy it, and doing some type of adjustment each month based on a physical inventory. I have a 1/1/12 beginning inventory and monthly physical inventories. How do I input purchases of merchandise so that the value of my inventory increases? How do I adjust my inventory at the end of each month to account for increases or decreases in physical stock? How do I do all of this so that my inventory value and CoGS reflects something close to reality?

    The CoGS accounts I set up are Purchases-Merchandise, Purchases-Packaging, Purchases-Shipping Supplies, (these all relate to the stock I actually have on hand), and I have a Purchases-Dropshipping account too which is not related to inventory (though I’m not sure it’s set up right).

    I’m not an accountant and I’m relatively new to QB so I appreciate you taking that into consideration with your answer! 🙂 Thank you very much in advance for any help you can offer!

    • BJ, I strongly recommend that you find an accountant to work with, or an experienced QuickBooks professional (try the “find a consultant” box on the right of this page), as this is a bit complicated to answer in short blog comments. And a lot depends on the details of how you are operating your business.

  • Hi Charlie,

    Can you please advise what would be the proper way to reflect the specific cost of an item sold instead of the average cost that QB generates. I’m using right now a journal entry to update the difference, but I will like to apply the adjustment direct to the item under the inventory account. Many times when these adjustment needs to be done, they are retroactive and I’m not sure of the repercutions.

    Thanks for your assistance.

    • Frank, why are you trying to do this? QuickBooks is an average cost system, if you start playing around with making adjustments you’ll have to find an account to post the difference to.

  • On my company’s qb, cogs is recorded 20 times more than normal on certain day after recording receipt of bill-credit for an item so avg cost also 20 times more. Making weekly report for company, i realize jan. 24th the item(fd000601)’s cogs is about $3,000($150 on jan 23th). I record the bill credit with the item to return on that day. Based on my assumption, the avg cost should have become just little higher than the avg cost like before recording the credit.
    Only on Jan 24 th, the avg cost is 20 times more and from Jan 25 the cost is the same as before. please tell me the reason.

    • Without being able to examine your file I can’t give a specific answer. Note that if your quantity on hand goes negative, very odd things show up in COGS as QuickBooks struggles to deal with the concept of negative inventory. That is the first thing that I look for when evaluating these kinds of issues.

      I would recommend that you get in touch with a qualified accounting professional who has experience with QuickBooks and have them examine the file. QuickBooks ProAdvisors have access to the Accountant edition, which has a number of tools that can aid in understanding these kinds of issues.

  • Dear Mr. Russell,

    You seem to be one of the most helpful guys I’ve found out there dealing with QuickBooks. So first I would like to say thank you for that.

    My question is this….
    After entering my order and then receiving with additional “Expenses” such as freight and trucking etc., the added cost did not average into the cost of the item purchased. I then manually costed and entered the landed cost for each of the almost 600 items before receiving the order with invoice.

    Is there a way to have the costs associated with the multiple items on an order be allocated to their cost proportionately?

    Also, my biggest issue now is that my average cost is showing for all items but I cannot create an accurate price list as it does not allow use of the average cost but only the cost as it is specified in the item set up. So if my cost has increased on an item that has been sold out or stock, my new stock is being priced for sale using the old cost that was entered at the time the item was created in the system.

    Please advise if you are aware of this limitation and if there is a way that I can work around it without having to manually go to each of my 2,000 items and change the present cost prices in order that my pricing levels are accurate. Is there a way to create a price list from the average cost? Is there a way to have the new purchase order and invoice cost replace the old data?

    I am starting to feel that QB is posing more challenges than it may be worth.

    Would really appreciate your assistance if you are able.

    Best regards,

    • Mark, you are correct. QuickBooks doesn’t calculate the “landed cost” of the item for you. It either has to be calculated manually, or you can move up to a more comprehensive inventory system that works with QuickBooks, like ACCTivate.

      As far as the price list, I would normally consider adjusting that based on the current purchase cost, rather than average cost. If you have QuickBooks set to update the “cost” field each time you purchase an item, then the “change item prices” function would update things based on that most recent cost. If you want to update based on average cost, send me an email (my address is in the blog author page) as I can provide you with information on a utility that will handle that kind of update easily.

      • Thanks so much for your response. I do not think I am set up with the update cost field. How do I do that? I would use the current cost price if I knew how to get it to register from the entered invoice received.
        I will send you an email.

        • That depends on what version/year of QuickBooks you are using. If you have Premier, or a version of Enterprise that is older than V12: When you receive an item at a cost that is different than the item’s “cost” field, you should get a popup that asks you if you want to update the cost. I usually recommend that you do (there are times where you might not want to, but usually you do). If that isn’t showing up, that means that you turned the question off. If the cost isn’t updating, then when you turned it off you told it to not update. The way to get that back is to open your “preferences”, and in the desktop preferences there is an option to “bring back the one-time messages”. You check that box and close the window. Then, the next receipt, it will ask you (on this user account, it is set per user) if you want to update the cost if it is different. There is a box in that question “don’t ask me this again”, and if you check that it won’t ask you again, AND it will remember what you said. So you want to say “yes” – it is up to you if you want to tell it to not ask again. Hope that makes sense…

  • Thank you for your help with this issue. I have a client with years of allowing their hundreds of inventory items go negative. For 2012 we went through the Inventory Valuation Detail and updated all the bills to dates prior to sales invoices to correct negative amounts. This seemed to work great at getting COGS to a reasonable percentage, but when I made a final adjusting journal entry to inventory/COGS, it made the Accrual Inventory lose $100,000 in value on a $25,000 entry. COGS recorded correctly.

    Have you seen the inventory just disappear like that? We are using the Inventory Valuation final total as our inventory value.

    • Leanne, I can’t say what is going on without having a lot more detail – and probably hands on. I don’t know what adjustments you made in detail. You should be able to look at the registers/ QuickReports and see what is going on.

  • Our controller is telling me I’ve done something wrong with a couple of our items. Our average cost is in the trillions or billions and it makes a few of the items go crazy. For this reason I haven’t been allowed to keep inventory totals in our qb 12. We’ve had to drop certain items and make almost identical item#s for them.

    I know our controller tries to adjust certain issues using the adjust qty/value on hand. But after it ends up incorrectly she tells me I did something wrong. When all I believe I’m doing is doing a sales order, billing it a week or 2 later and when the lady sends it through billing ‘the average cost and amount’ end up in the trillions.

    I don’t think there could be too may factors causing this
    and rather than me say all the things I think could have caused this, maybe I could answer any questions you have that could answer this.. I’m just at a lost to explain this but it is up to me to do so with our team apparently.

    • John, you probably should sit down with a knowledgeable QuickBooks advisor who can look at what is going on and help. Either someone is adjusting something incorrectly, or you have some damage in your data file, or you have an inventory part that you are allowing to go to a negative on-hand balance. Do you have a positive (or zero) on hand balance for this item?

      • Most of the on hand balances are negative between -10 – -5,000 or so. I was going through and updating them intermittently as the items would be restocked.
        But when I came into this position they had switched over from passport and no one ever set up an accurate on-hand balance. So about 3 or 4 months ago I decided I would update the items I manage as they were restocked, knowing it would take a few months for them all to become accurate – Rather than have someone in the warehouse do a full physical inventory(I wanted to wait until I’ve been here awhile before requesting that).
        So slowly I started updating the on hand quantities and then after about a month or so I was told to basically stop. I don’t think what I was doing was necessarily wrong. But I know there are only certain ‘stock items’ we keep the exact qty on. I was also told our CPA couldn’t figure out what was going on with it either, that information is probably inaccurate too. I just think certain things get ‘adjusted’ daily so that when items are invoiced this doesn’t happen.
        I’m not saying there is any illegal activity going on. Just a continual tolerance of inaccurate data that I can no longer tolerate.

        • John, negative quantity on hand is a MAJOR problem. It destroys your COGS calculations.

          QuickBooks handles COGS on an average cost basis (unless you use Advanced Inventory in Enterprise, with FIFO enabled). There isn’t a way to calculate an average cost that is accurate when you have a negative quantity. QuickBooks comes up with a number, but it can vary wildly.

          In the short term, if you have an item that you sell before you receive it (sell when negative), and in a short while you receive the item and bring the balance to zero or positive, QB will adjust the COGS value to an appropriate number. However, if a long period of time (which isn’t defined) passes between the sale and the receipt, QuickBooks will make an adjustment to COGS to bring it to a proper balance, and this adjustment drives bookkeepers/accountants crazy. It is hard to audit.

          However, what is worse, if you do NOT bring your quantity back to zero or better, QB makes some very odd calculations for COGS, and they are not corrected. I’ve seen some bizarre numbers be posted. You won’t be able to make sense of it. Again, because you can’t calculate a true average cost of items when there is a negative quantity on hand.

          The Accountant edition of QuickBooks has a feature that tests for these kinds of issues. Any CPA who is a Certified ProAdvisor should know about this, and be able to use it to find problems.

          FIXING the problem is tough. One step is to bring balances back to proper values (quantity on hand) and ALWAYS keep them up to date. Making adjustments to handle this can be very complicated, and it is hard to work out things in your financial statements. And this won’t do any good unless you can keep your inventory records accurate. ALternately, if you can’t keep accurate balances, why do you have these as inventory parts? There is no value in that if you don’t have accurate quantities. In that case, I would make the inventory parts inactive (after adjusting their quantity to a zero balance on hand) and create new parts to replace them, as non-inventory parts.

          This is a very general description, there are a lot of details to attend to. You need to work with someone who understands inventory and these issues in QuickBooks, or you’ll get off into some other potential problems.

  • Thanks for all your help Charlie.
    I am one from the younger generation working at this business – And many I work with become overwhelmed easily with new software. Whereas I look at it and need to know why it tells me I’m right when I’m wrong.
    But maybe I can start an inactive movement here until we get this sorted out. So Thanks again!

  • I am a very simple non profit organization, People donate children’s clothing to me. I gave each item a $1.00 cost in the item list.
    When I give this item out to a chocolate, I invoice the School using the inventory part. This will give me HOW MNY ITEMS I gave out to each school on my reports.
    I have set up Donations In = Vendors
    I have set up Donations Out = Customers.
    I have worked with G/L accounts most of my life, but find QB 2013 for nonprofit just puts inventory into G/L accounts automatically.
    I am guilty of putting in neg items, but just did a physical inventory, hoping this will correct all of the crazy -$ amounts in inventory Assets and Cogs. I entered all items in an Inventory Adj. transaction. This just doubled my COGS.
    Please tell me the basic procedure of bringing in Donated items. – if I go through all of the Vendor steps, I will end up with MONEY TO DEPOSIT. which I do not have ANY Money- just items.
    Same with Invoices to Schools. – if I go though al of the processes it mess up my G/L accounts.
    Bottom line. I do not need inventory items – just need the count of each piece out linked to School receiving it.
    Please help me.

    • Mary, I don’t work with non-profits, so I’m not sure of all the ins and outs of that kind of operation. However, unless it is really important to know how many of a particular item you have on hand at any time, it seems to me that you don’t want to use an “inventory part” item. You can use a “non-inventory part” item, for example. No quantity on hand to worry about. You can STILL see sales quantities of these items in the “sales by item summary” report, for example, for these kinds of items.

      That would simplify your process, probably.

      However, you need to find a QuickBooks advisor who can sit down with you and go through your process and help you work out these details. It isn’t something that I can do for you through blog comments.

  • I have a huge inventory problem, and I am not sure of the best way to correct it.

    We transferred 3 months of data into a new quickbooks database. Upon doing so all of our build assemblies came over into a Build Assemblies Account, and came over as adjustments, not build assemblies. Our values for some items are way off for a period of time between March and April, but have slowly come back to the right value. I have the old database to compare to, so I can come up with the journal entry to correct inventory and cogs for each item, but my concern is the inventory value is wrong too. If I adjust the inventory value of an item does that also affect the current value? Because as you know over time the value of the inventory came back to the correct amount on its own.



    • Tammy, it is hard to give a specific answer without seeing what exactly you did. You don’t mention how you did the “transfer”.

      You don’t want to make journal entries that affect your inventory asset accounts, because that creates problems in other areas. Your balance sheet asset values won’t match the values in the inventory stock valuation report, for example.

      If you are looking to adjust the inventory asset value, you are better off using “inventory value adjustments”. These let you set the total value and quantity (and therefore the average cost) of the item as of the date of that adjustment.

      However, if you aren’t totally sure of what you are doing, I recommend working with a knowledgeable QuickBooks accounting professional to make sure you do it right. Use the “Find a consultant” banner at the upper right of this website. AND, if you do it on your own, MAKE A BACKUP copy of the file BEFORE you try doing any adjustments.

  • Hi,

    I would like to change the cost of a COGS item beginning Apr 1, 2013. I went in to Customers>Items List>Inventory> and change my part # to the new cost price.

    I then enter my sales invoice with the part item in the invoice but I do not see the COGS hitting my P&L.

    I’m not sure what I’m doing wrong. Also, when I change the COGS price it doesn’t say from which date I would like to make the change so I am probably doing something wrong.

    Basically, my COGS increased in price so I need to adjust in QB to flow through my P&L. The COGS part item is associated in the sales invoice I set up but it’s not flowing to P&L COGS when I enter the sales invoice.

    Can anyone help?


    • Mark, as I mention, the “cost” field in the edit item window has no effect on financial accounting in this system. You cannot adjust the average cost (which is what generates the COGS value when you invoice something) in the Edit Item window.

      You have to use the inventory adjustment feature, and make a “value” adjustment to set the average cost on the date that you select.

  • My COGS line was increased for periods 1 to 4 when I re-ran the P&L in P6. The Net Incomes in those 4 periods were then decreased by the same amounts. Why would COGS increase after periods were closed? Thanks.

  • Thanks for this article. It works as I thought it would on paper. I just pushed 100 of 1 item to QuickBooks, however, using QBXML with a cost of $80.00 and sale price of $100.00 – but the average cost came back as $203,283,856.55 – erm whatnow?

    Any ideas why this would be? I don’t think the total of ALL inventory goes anywhere near this.

    Thanks in advance.


    • John, we aren’t really set up here to handle QBXML (SDK programming) questions here. You don’t tell us what kind of transaction you are using to “push” the items in, and the details of your XML code, so it is impossible to comment. You also don’t mention which version of the QBSDK you are using (some have different bugs than others) or of QuickBooks (again, some have different bugs than others). Also, the average cost for an item is highly dependent on the quantity on hand – if you have a history of negative quantities for the item then you can get some rather bizarre values for average cost sometimes. Finally, there can be data corruption (again, negative quantities can be an issue there) with an individual file.

  • Charlie, I am starting an importation business of clothing and sport equipment. I am having problems to figure out what amount to put in the cost field. I import from Italy to the USA. All the items I import have duty taxes and shipping costs. I am using Quickbooks 2013 MAC.
    I created all the income accounts for all the items. Now, I would like to add inventory Items and connect them to the income accounts i created.
    – First question, Should I convert from Euro to Dollars before I add the cost in the inventory items?
    – Should I evenly distribute duty taxes and shipping costs to all the items of that specific purchase order or just track them as expenses when Receive inventory?
    – Since the cost of the items is variable due to the conversion Euro-Dollar, Should I leave the cost field blank?
    Do you have any idea of how I should be handling this?

    Thank you

    • Tony, I’m not going to give you a detailed answer on those, as I am not an accountant. These are questions that you should be going over with your financial advisor.

      Leaving the cost field blank in the item list isn’t going to change anything. You are still going to be receiving the items at a cost, and that is the key point for costing. To be honest, what you enter in the “cost” field in the inventory item record is just a default value for your item receipts – you will override that when you receive the item, if they are “inventory parts” (I don’t work with the Mac version, so I’m not sure what details those records have).

      Currency conversions are a significant issue and can be very complex. You do need to work with an accounting professional who knows how that works.

      In the US, in general, if you are holding these items as inventory parts for any length of time, then you would be distributing the taxes and shipping costs across the items that you receive. But, that depends on how you are setting up your item list.

  • Thank you Charlie. Since QB for Mac 2013 doesn’t support multy currency, I was told to enter the landed cost already converted from Euro to Dollar, including shipping and duty taxes.
    I do have a question you might be able to answer. I just want to make sure I am doing the right thing.
    It is about adding Items to the inventory.
    I created an income account for every item I sell. I used numbers + description for the income account name.
    Then I started adding items to the inventory. My question is:
    – Should I use the same name including the number I used for the income account for that specific Item?
    Also, QB automatically creates a COGS account.
    – Should I create COGS sub-accounts for every item I have or it can stay the same?
    Thank you in Advance

    • Tony, in a general sense, I like to keep my chart of accounts simple, and use things like items (and related reports) to see details. I generally have just one COGS account, and as few income accounts as possible. In MOST businesses, I would never have a separate income account by item sold. That is too much detail for the COA. I like to have my P&L small enough to see everything on one page (or two at the most).

  • Charlie,

    I have an issue whereby items were purchased earlier in the year at a different price,but the prices have currently gone up.

    So when posting the sales in quickbooks,it picks the recent inflated prices thus showing a loss and yet this set of items were bought say when they were $50 and now cost $80 and the items were not all sold,so now it picks the $80 as the buying price being sold at the $70 as was the initial price earlier in the year,how can i address this??

    Thanks in advance

    • Andy, you have gotten me a bit confused with how you are using the words “price” and “cost” here. I think you are mixing terms around a bit. “Cost” is what you are paying for the item, “Price” is what you are selling that item for.

      If you buy an item for a cost of $50, and hold on to it, then buy another later on for a cost of $80, QuickBooks stores the “average cost” of the items. Let’s say you bought one of them at each price, so now you have two of them and the average cost is $65. If you sell one, the COGS value is $65. That is accurate when you are working with an average costing system. If you sell both now, at a cost of $65, that is $130 of COGS. Well, note that this is the exact amount that you bought them for, in aggregate.

      This assumes that we are talking about “inventory part” items. Other item types work differently. It also assumes you are not using the FIFO feature of Enterprise with Advanced Inventory.

  • Charlie,
    My father has a vending business, and has never setup proper inventory with a numerical, barcoded system. I began using QuickBooks for this new year, but in order to create inventory items, I will have to go into the warehouse and count every item plus create a stock item list, which I have no experience with creating random product numbers. I wouldn’t even know where to begin to create some sort of stock item list to import into QuickBooks. I’ve been looking into this entire process and how it works. Let’s say that I have a beginning inventory of $200K (once I finish my count). Where do I add this starting balance in QB? Or does it work rather that by the time I add each and every item, cost, and quantity to QB, QB should automatically generate that value of $200K. So, once I finish counting and adding items, where will I see if my value of $200K is accurate? And how do I determine the cost of each item? We buy items for resale in bulk; we clean out warehouses and have to take everything in them. How do I know what to include in inventory?

    What determines the cost value of the item? Is it the market value? I can’t use the ‘last purchase cost’ to determine the value because many items have been sitting on the shelves for years or are purchased in bulk amongst many other items, so it’s hard to say what exactly was the purchase price for each item. Thank you in advance!

    • Elize, my apologies for this answer, but I’m going to say “I can’t help you with that” at this time. Not through blog comments. You are asking some VERY GOOD and important questions. These are things that you need to talk to your financial advisor about. If you are using QuickBooks for your financial statements and tax returns, the answers to these questions are extremely important. It isn’t something that I’m going to be able to give you proper advise on through this mechanism. You are on the right track with things, and you have a good idea of the questions.

  • I forgot one more question. Let’s say that we sell dollar bill acceptors. Within the acceptor are many parts, some used or some new that have been added to the bill acceptor. When I Invoice my customer, I put that I’ve sold them one unit acceptor. I do not list the other items included in the acceptor. With adding every item to inventory, how will I have to account for the items that were added to the acceptor, so that it could be invoiced as one unit? For example, we may have 100 bill acceptors beginning this year. I add to inventory. I purchase 10 harness that will be used within some of these acceptors. So, I add harness to inventory, then add a PO for the harnesses I purchased. When it’s time to invoice a customer, they purchase a bill acceptor with one of the new harnesses. In order to subtract the harness from my inventory, would I have to Invoice the customer for the harness and the acceptor? Most acceptors come complete without having to purchase new parts. I don’t want to have to Invoice for both harness and acceptor, in order to remove the harness from inventory. Is this possible? Thanks!

    • There are various ways to handle this, the best way depends on a number of factors. Again, an accountant who knows QuickBooks, or a ProAdvisor, can work with you on these details.

      In some cases you might just expense the acceptor when you pay for it. That depends partially on how expensive the item is, how long you hold on to them, and more.

      In some cases, if you have Premier or Enterprise, you might create an “inventory assembly” item and “build” the final assembly. That would consume the components (the harness, etc) and provide you with a finished product, that you can sell.

      In other cases you might want to use a “Group” item, which would let you include the harness in the sale (or not, as you wish), but hide it from the invoice.

      Lots of factors here, including the cost of items, how often you do this, how you price things. Too many considerations for just blog comments.

  • Just wondering is there any way to get a report that shows you what you paid for an item? I need to have something that shows actual cost. We buy surplus parts so our cost vary greatly from batch to batch. Avg costing just doesn’t make any sense for us. Actually not for anybody. It was a cheep copout on QuickBooks programing dept. However, is there any way around it by being able to get a report that shows you purchased 10 widgets at 1.00 on Feb 12th and then another 20 widgets at 2.00 on March 20? Maybe that I could export into an excel file???

  • Hello Charlie,

    First of all, I would like to thank you for the time you dedicate on reading and replying to all these posts. I am sure it has helped a lot of people.

    I work for a small furniture importing company, and we would like to know what is the best way to distribute shipping and customs costs to each inventory item. Is there a way to make every inventory part reflect its landed cost once we have figured out what percentage applies to each item?

    Currently, we account for merchandise inventory using QBs and a Point of Sale Software (LightSpeed). However, it feels like we do things twice, and often the two software don’t match on their inventory account and COGS. This is because every time a sale happens QBs sends the “original cost” to cost of goods sold, while the POS software sends the “landed cost” to cost of goods sold. I would like to take the greatest advantage of both programs and make them work in synchronization.

    Would it be a good idea to use Quickbooks to account for inventory globally (registering shipping costs, custom fees, transportation insurance as part of the total value of inventory), that is without the detail of every single item in the store, giving this last function to the POS software?

    I will highly appreciate your insights with regards to this.


    Henry A.

  • Hi,

    please help me I want my worker should just be able to crate invoice and don’t see any item cost is it possible I don’t see how

    I have QuickBooks Premier 2012

    thanks so much

    • Cost won’t show in the invoice screen, just price. If you are in the invoice, and the cursor is in the item name field, press ctrl-L to open the item list, Find your item there (and you can see the cost there), select it, press ctrl-U and that item is added to the invoice.

  • Hello Charlie,

    Thank you so much for the articles. They were extremely helpful. However, I have not been able to find a website to purchase the Freight Allocator Utility. I would appreciate your guidance.

    Also, I would like to have your insights about the fact that I work not only with QBs, but also with a Point of Sale Software that helps me keep up with merchandise inventory. Is it possible at all to keep inventory in QBs as a global amount without specifying the items, leaving this task to the POF software? If the answer is affirmative, what are the pros and cons of doing so?

    Thank you so much.



    • Henry, the link to Karl Irvin’s File Allocator Utility was in the article I referred to earlier. In any case, you can find it at http://www.q2q.us/FRAoverview.htm

      Different POS products work in different ways, so you can’t make a general statement about how it would work. And, there are many variations of situations. In general I would tend to leave the inventory management up to the POS product, but that would depend on many factors. If you are handling all of the purchasing and other management of inventory to the financial software, perhaps the details would be better there. It all depends on the details…

  • Hello,

    I would like to ask if I have $100,000 of material. 30% of the material has been sold, but the 70% needs to be entered under” Cost of Goods solds”. So, how do I enter this in the percentage in quick books? because every day/week this would change and I find percentage would be better instead of changing he numbers all the time. Any help would be highly appreciated.


    • How are you using QuickBooks, Natasha? If you are using inventory parts and selling them in invoices or sales receipts, then the COGS posting is taken care of for you. We would need more information as to what you are doing. QuickBooks works best if you use the various transactions that it supports.

  • Hi Charlie,

    I have a question about the average cost calculation in QuickBooks. I started a business earlier this year. I started collecting sales through an online store in April, but I didn’t receive inventory into our warehouse until June.

    The products I sell are inventory assemblies. I “built” the assemblies in QuickBooks when I received the inventory (dated in June). The COGS expense related to the sales starting in June are correct, but the COGS expense related to the sales in April-May are incorrect.

    Can you explain how the April-May COGS expenses are being calculated? Since I haven’t sold these items before, I would expect the average cost to be $0, but instead, I’m seeing a number that I cannot make sense of.

    Is it possible to adjust the average cost (or COGS expense) for the April-May time period only?


  • Charlie: Running the “inventory quantity by item” report shows some minus quantities. When I click on one of the minus-quantity items, it shows sales invoice (“invoices,” in QuickBooks parlance) quantities in excess of purchase invoice (“bills,” in QuickBooks parlance). Are the sales invoices, making up the minus quantities, posting to the general ledger (debit accounts receivable, credit revenue, debit cost of sales, credit inventory)? If so, then my balance sheet inventory is understated, my cost of sales overstated, both by the amount of inventory that I haven’t yet received. Right? –Dan

    • Dan, negative inventory balances are something you should avoid, for a lot of reasons. I’ve discussed this in more detail in this article: http://www.sleeter.com/blog/2013/07/quickbooks-negative-inventory/

      QuickBooks can’t do the weighted average cost calculation with a negative number, and Intuit decided that they don’t want to have a zero COGS value posted, so they will use another figure and then make an adjustment later on when inventory reaches a zero or positive value. The value that is used varies depending on the situation – it could be the last average cost, it could be the “cost” value, depending on circumstances.

  • I’m not following, at all, the reason that QuickBooks should have any problem with minus inventory quantities. If QuickBooks is averaging costs as it purchases and sells inventory, it is tying dollars to quantities, as the average moves upward, and as the average moves downward. Once a quantity get down to 1, then you should have, in the inventory general ledger account, the dollar amount representing the average cost (however many ups and downs that average unit cost has been through) of 1 unit. Once the quantity hits zero, you’ve already depleted your entire inventory dollar pool, so there should be an average unit cost of zero. If your quantity is at zero, but QuickBooks is saying that you have anything other than a zero average unit cost, that has to mean that Quickbooks’ previous computations, of average unit costs, as you purchased and sold units, were incorrect. It sounds as though QuickBooks doesn’t take the word “average” very seriously; otherwise, how can you have average unit costs unless you have units on hand? Thanks… –Dan

    • You can’t use a negative value in the weighted average cost calculation. Having a “negative quantity” just doesn’t make sense. So QB uses a figure that it comes up with, and then makes an adjusting entry later to correct things when you fix the problem. If you fix the problem.

  • Thanks for the information, I have question regarding the selling and purchase price fluctuations.

    * Our Company has practice for 6 months for purchasing of Mobile Card with discount of 10% discount from the Original price and selling back to the third parties on profits from particulars Telecommunications.

    Now the Situations is : Telecommunication Company Set the monthly commission on target achievement without purchase discount after 6 months of practice on discount and recording to our QuickBooks System on daily basis. Now We purchase and sell at the same price but the Quick shows loss or profit because of the previous selling on profit and purchasing on discount.Now after recording purchases and sales it shows the different Profits since we do not have profit on selling but target achievement commission.

    Sales 4,212,000.00 4,212,000.00
    Purchase 4,297,500.00 -85,500.00
    140,400.00 54,900.00
    Sales 143,250.00 -88,350.00
    117,000.00 28,650.00
    Purchase 119,375.00 -90,725.00 Net loss

    * I removed the selling and purchase cost from the item but still loss shows on profit and loss accounts each day because of the previous selling and purchase price.

    I hope to hear from you as soon as possible.

    • Sikandar, I’m not sure that I follow exactly what you are looking to do. Keep in mind that QuickBooks is an average costing system for inventory parts – if you are trying to figure out commissions for the purchase/sales of individual items, this might not be the best system for you. You either have to find another way to track your commissions (not using “inventory item” parts), use a commission add-on product of some sort (I don’t have a recommendation at this time), or use a different accounting system that does specific costing.

  • A company orders stock items which will be received in 2 months’ time. It receives a bill from the supplier and makes full payment. At the same time, it raises a 50% invoice to its customer and receives the payment. Cost of goods sold is not calculated at that time. One month later, it raises a 30% invoice to the customer, receives payment and again the cost of goods sold is nil. When stock items are received after 2 months, the company raises the remaining 20% invoice to the customer. At that time, the full amount of cost of goods sold is calculated. However, same can be in a different accounting year. Can we reflect the cost of goods sold when invoices are raised despite stock not yet received.

    • I’m not sure if I am following you on this, Ashley. COGS is booked for inventory parts at the time of the sale, using the average cost of the item at the time. It isn’t clear in your description when the items are received but I’m guessing you mean that they are received after the invoices go out. You would have to get advice from your accountant on this, but I would consider these as prepayments for items that aren’t delivered, which means that you have a liability. This is complicated to set up. It is going to involve setting up liability accounts, doing adjustments, managing prepayments.

      • Hi Charlie. Thank you for your reply. Please see clarification below:

        Year end 31 December 2014
        1 November 2014, Company A orders stock items from a supplier.
        2 November 2014, it raises 50% invoice to one client for these goods.
        5 January 2015, it receives the stock items ordered on 1 November 2014.
        5 January 2015, it raises the remaining 50% invoice to the client.
        When is the cost of goods calculated? Normally it would be on 5 January 2015.
        From the profit and loss statement, the first sales figure will appear on 2 November 2014 with no cost of goods sold at that date. The Cost of goods sold will appear after year end, on 5 January 2015. From the financial perspective, we have sales with no cost of goods sold as at year end, on 31 December 2014, thus increasing our profit.

        • COGS is calculated whenever you create an invoice. It is “cost of goods sold”, and the invoice is a “sale” – if you are working with Inventory Part items. If you are working with other types, it is different.

          So, the COGS for the portion you invoiced on November 2 (again, assuming inventory parts) will be calculated on the quantity that you sold on that date, using the average cost of the items at that time. One January 5, COGS will be posted for the quantity of items invoiced then, at whatever the average cost of the item is at the time.

          Now, if you used non-inventory part items, there is no COGS calculation at the time. These items cost is posted to the expense account you select, at the time of the purchase (not the sale).

          For the inventory parts, the date of RECEIPT of the items sold may be key, as on the day they are received their average cost is adjusted. And if you enter a bill at a later date, for the same items (using the same transaction), that can change WHEN the cost is received, therefore changing the average cost calculations.

  • Hi Charlie,

    We don’t use QB in my company, we use a program called Syspro, but my question is pretty generic. Our manufacturing method usually has a few steps involved, and to keep inventory levels straight, we enter production for each step. Sometimes the 2nd step enters production before the first step causing one inventory to go into the negative. Obviously that’s not that big of an issue considering you can bring it back to zero once the 1st step is entered. But each step has a $$ figure attached to it, and when it goes into negative it uses the last cost entered to value the second step. Now my question is this, if the last time I produced the item it cost $100, the second step costs $25, the COGS would = $125, but what if it didn’t cost me $100 to produce the items this time, what if it cost me $110. Where production on the second step was already entered, the product has a value of $125, but it should actually be $135. When you bring the inventory back to zero, the value doesn’t go negative or anything. Where does the $10 go?

    Thanks in advance!

    • Every accounting system has its own way of dealing with negative inventory. I don’t know Syspro, so I can’t say what they are doing with it. In QuickBooks you could see a journal listing for the transactions, and see what it did. And, depending on the timing of things and the exact steps, the value would probably come back to the proper amount retroactively (again, depends on the exact sequence).

  • Hi Charlie,

    Our company sells rice. We order rice from rice mills to sell at our shop and have some rice directly delivered to our customers. We would like to record the specific cost of the rice directly delivered to customers as COGS. If we record the purchase and issue invoices, QuickBooks use a different COGS (FIFO) because we are using QuickBooks Enterprise V15.

    Our aim is to match the price charged by the rice mills as COGS for those directly delivered to our customers.

    Please kindly advise us how to deal with this problem.


    • Vincent, there is no simple answer with QuickBooks. The basic QuickBooks inventory system works on average cost. If you use the Advanced Inventory option in Enterprise you can enable the FIFO costing option. That is pretty much it, unless you want to make every lot of rice be a different item number in your list, to be used once. I definitely don’t recommend that. There may be other inventory add-on products, or other accounting products, that give you better options. I know that ACCTivate (http://www.acctivate.com/Solution/Inventory/) has a specific-costing feature, for example. That is a great product, it works with QuickBooks for the financials.

  • I have two problems regarding the matching of the valuation report to the balance sheet: 1) how do I find the problem? and 2) how do I FIX the problem!

    • 1) Make sure that you don’t have any inventory parts or inventory assemblies that have a quantity on hand that are marked “inactive”.

      2) Make sure that you haven’t made any Journal Entries against your Inventory Asset account.

      Those are the first two easy things to look for – both situations will cause the report to not match the balance sheet. That is the starting point.

    • You asked in two places…

      1) Make sure that you don’t have any inventory parts or inventory assemblies that have a quantity on hand that are marked “inactive”.

      2) Make sure that you haven’t made any Journal Entries against your Inventory Asset account.

      Those are the first two easy things to look for – both situations will cause the report to not match the balance sheet. That is the starting point.

      • Sorry about the double posting. I do have general journal entries that were posted against the inventory g/l accounts which explains part of the issue. How would I fix this?

        • You have to figure out why you did those postings, and then come up with an alternative way to handle what you wanted to do that involves something like (perhaps) an inventory adjustment transaction, rather than a journal entry, and then delete that journal entry. Can’t give specific advice without seeing the details. You might want to make a backup copy of the file first, before trying this.

  • Hi Charlie,

    Can you please clarify on the below:

    Day1. We invoice for 2 items
    Day2. We invoice for 3 items
    Day3. We receive 7 items in stock e.g £100 per item = £700
    Day4. We invoice for 5 items

    How is cost of goods sold calculated on day 4? I know that on day 1 and day 2, the COGS is zero and on day 3, the COGS is $500.

    • That depends on a few factors. Is this a new item that you added on day 1, that didn’t have any history? Was the balance on hand on day 1 zero? Was the “cost” and “average cost” values on day one zero? If so then the COGS will be zero for day 1 and 2. If not, then the COGS may have a value, depending on all of those factors.

      Most likely the COGS on day 4 is 100, but you have to look at the average cost and the quantity on hand (to be sure it is positive) on day 4

  • Hi Charlie. Thank you. I cannot understand how you got 100 for the COGS on day 4. Does QuickBooks use the FIFO or Average cost method?

    • My apologies for not stating this clearly. I meant to say 100 per item. But, again, there are some other factors that could be involved that would vary that figure in some cases, depending on timing and other factors.

  • First, this blog is a wealth of information on how QuickBooks behaves, thank you!
    The answer to my question may be somewhere here already but in my searching I cannot find it.

    If I close a financial period, does the data from item cost still get pulled into the average COGS?

    • You don’t truly close a financial period in QuickBooks. You can set a closing date, but that just makes it harder to make a posting before that date. None of this affects COGS or average cost. Average cost of items is affected by item receipts/bills and possibly inventory adjustments. COGS is calculated at the time of the sale, based on the average cost at that time.

  • thanks charlie for nice explanation & making our concept clear . please explain the sales price feature also .

  • Hi Charlie,

    I bought a 10 user QB enterprise, i just have a question, is there a possiblity to hide the item costs? i dont want my staffs to see the cost of the products im selling, but they can see the selling price. thanks a lot!

  • The company I work for is a Dry and Cold storage facility. We currently are using Quickbooks Enterprise 2015 with the Advanced Inventory and barcoding system. Our issue is this…. Customer A buys 1,000 pie tins from us. We purchase the pie tins from Vendor 1. We bill Customer A for all 1,000 pie tins when we receive them from Vendor 1. BUT Customer A doesn’t want all 1,000 pie tins at once. They want 50 here, 100 there, etc… over 1 years time. So we store the pie tins in our warehouse and deliver the pie tins in small increments over a year. How can we track this in Quickbooks? Before we turned on the Advanced Inventory system we created an item # as non-inventory and inventory… Example… 120-3120ABC is non-inventory and 120-3120ABC-INV is inventory. When we created a purchase order we would use the non-inventory part #, then we would bill the customer in full with the non-inventory part #, then when we release the small increments of pie tins we would release it by invoicing our customer with the Inventory part # with a $0. Now that we are using the advanced inventory this process does not work!!!! Before Advanced Inventory we were keeping track of inventory in excel spreadsheets 🙁 … clearly we want to get away from that. What can we do to fix this?? Thank you!!!!! Kristin

    • That is complicated – because if you have billed the customer for the full amount, you have a liability for those items that you haven’t delivered yet.

      Why can’t you do this with AI enabled? What is happening? It may depend on what features you have enabled.

      Are you using the Multiple Location feature? For the spreadsheet part – you could track the quantity you still have on hand as being at a “location”. But that would depend on how many customers you have that work this way.

      If you have invoiced them in full at the time of purchase, what kind of document do you want to have when you actually deliver the items?

      • I can’t figure out a way to do it in Advanced Inventory. Yes I have the Multiple Location feature enabled. I don’t want to use a spreadsheet anymore. I only want to track inventory in quickbooks. Currently this is my process and why it doesn’t work.

        On 1/1/11 ABC Winery would like 1,000 wine bags
        Item# 123-WINEBAG (non-inventory) & Item# 123-WINEBAG-INV (inventory)
        I create a PO & receive a bill to/from our vendor with Item# 123-WINEBAG
        Then I would invoice ABC Winery for 1,000 Item# 123-WINEBAG
        BUT ABC Winery doesn’t want the wine bags right now so I store them
        PROBLEM…. When I receive my product I can’t barcode scan it in because I used a non-inventory part # on the purchase order. Because I can not receive the product in inventory I have no way of tracking this product in inventory.

        On 3/1/11 ABC Winery would like 500 of the wine bags we are storing for them.
        I invoice ABC Winery for 500 of Item# 123-WINEBAG-INV and use a $0.
        PROBLEM… I have no inventory to deplete from.

        Currently, after I receive the product and bill from the vendor I have been going to the Inventory Center and adjusting the inventory item # to reflect how many bags we received.

        There has to be a better way to do this! Please help!


        • I can’t give you a full answer as I’m not a CPA, and there may be some tax or regulatory issues that cover what you are trying to do. You really should work with a financial advisor on this.

          I would look into receiving the item as an inventory part. Then you can barcode, and see the quantity you have. You can bill them (I assume you bill them for the entire amount up front) using a non-inventory part, so that doesn’t reduce the quantity you have. Then do an inventory adjustment each time that you actually ship them something. Use a “location” to keep track of the quantity for that particular customer, if you aren’t using that for something already.

          There are issues, though, and you have to talk to an accountant on how to deal with this. This method creates an inventory asset for you, and that might not be the way that an accountant wants them to show on your books. You may have to either play with the “asset” account that you use for these items, or you may have to do an additional adjustment. I’m just not qualified to give you a full answer on what the best approach would be here.

  • When you put in your cost of item, should this include shipping costs or combined “landed cost” ? Or just the physical cost of the item? Please advise.

  • Hello

    I am hoping you could answer a question for me that QB cannot seem to answer. We are having problems with our P&L Reports and I thinks it’s due to the inventory adjustments. Since the beginning of the company they have always let the inventory go into the negative and then done several inventory adjustments over the course of the last 6 years. In the last 3 or so years they have let it go into the negative for an entire year and done a year end inventory adjustment. Does this effect each items value / cost, the values/costs are way off and thus making the P&L look horrible. Is there a simple way to fix this? The owner wants me to go in and delete ALL of the inventory adjustments and re-enter as of end of last year. He is thinking this would fix the value as I could do the qty and value at the same time and get rid of all the other ones that are confusing the reports. I am not sure that that would fix the problem, What do you think? Any info provided would be appreciated.

    • It is difficult to give a specific response without having hands on the data – you should work with a qualified accounting professional who understands the issues involved, and who has access to your database.

      Going negative for long periods of time is a big problem, as you have found. However, there is also the possibility of incorrect adjustments (posting journal entries to the inventory asset account is an issue, for example), and sometimes you can get some file corruption occurring if you let negative inventory build up over long periods. Deleting all the adjustments might work, might not, depending on what is going on. And, it isn’t clear what you are talking about as far as “re-entering” data – you could just be pushing the problem from one place to another.

      Sometimes it is better off creating a new file that has the correct values to start with. But that also has some baggage.

      And, the solution you are seeking must include some way to avoid creating the problem again. You can’t just continue with having negative inventory again.

      You need to work with someone who can sit down with you and give you a comprehensive solution.

  • I am trying to determine why an invoice recorded in QB using an Inventory Part Item would have no affect on Inventory or COGS. I thought it might be because the inventory has gone negative and/or because the Avg Cost on the Inventory Valuation Detail report is 0.00. The Cost column on the Inventory Valuation Detail report shows nothing but on the Item List, there is a Cost entered for each item and a Average Cost showing. Why is the Inventory account and COGS account not affected? How can this be corrected?

  • Charlie,

    How can i correctly record the total cost of an inventory if purchase them from overseas where i will incur duty, freight etc. The list price will be ok as i will receive items with the cost from supplier but will need to add additional cost such as duty, freight etc…which is paid to a different supplier?

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