Sometimes it’s good just to review the basics. After all, this is our “Accounting Tips” series, and we started out with the premise that we’d examine the fundamentals. So, now I want to look at QuickBooks Items – more specifically, two-sided items.
I chose this topic because recently I read in several forums some questions that tend to indicate that QuickBooks users, and even some QuickBooks consultants, may not be familiar with the “best practice” of using two-sided items.
QuickBooks uses Items to link sales and purchases to accounts in the Chart of Accounts. Items are required on sales forms such as invoices, sales receipts, estimates, credit memos and statements.
You also must use Items on purchase orders, but their use is optional on bills, credit card charges and checks. Because QuickBooks uses Items so extensively, it’s important that the Items used in a company file match the needs of the business.
Let’s look at some of the various item types:
* Service Items
You use Service items to track services sold to or purchased from others. Using Service items to record employees’ activities allows you to allocate paychecks to specific services, customers or jobs. Service items cannot be changed to another type of item after being created.
* Inventory Part Items
You use Inventory Part items to track materials or parts your clients buy, keep as inventory and then resell. For each inventory item, QuickBooks tracks the current number in stock and the average value of your inventory after every purchase and sale. You assign an asset account (such as Inventory Asset), revenue (income) and expense (cost of goods sold) accounts.
* Inventory Assembly Items
You use this type of item to create other items that contain assembled material units (finished goods or sub-assemblies) that clients buy or produce, track as inventory and then resell. The ability to create and build inventory assemblies is available only in Premier, Accountant Desktop and Enterprise editions of QuickBooks.
* Non-Inventory Part Items
You use these for materials or parts bought and sold, but for which you don’t intend to keep inventory on hand. This could include custom orders, one-time products, etc. A common use of this type of item is for drop shipments, so the invoice can be created before the bill is received for the product without creating a negative inventory situation.
* Other Charge Items
You use these to track income and expense not related to the main products or services of the company. Examples include shipping, delivery or finance charges.
* Group Items
You can set-up Group items when sale or purchase transactions frequently involve the same group of items over-and-over again. Instead of entering each item individually, you can save time by entering the name of the group that will then add all the items in the group to the transaction automatically. You can include up to 50 items to a Group item. One typical use of group items is “kitting.” For example, if you sell items in a basket your group would include the basket and the various items sold in that basket.
Groups can include all item types except other Group or Sales Tax Group items. You also can elect to hide the details of the actual items within the Group on the sales form. Even though they appear in the on-screen version of the form, they will not print on the transaction if you don’t check the box labeled Print Items in Group.
* Subtotal Items
Subtotal items add up the prices of the items in the rows above it, up to any previous subtotal. You need to create a Subtotal item if you want to apply a percentage discount or surcharge to several items. A Subtotal item does not affect any accounts. It is just a calculation for use on forms and its amount cannot be overwritten.
* Discount Items
Set up Discount items to calculate amounts to be subtracted from a total or subtotal on forms. You can set up discounts as either percentages or fixed amounts. Discount items affect only the line item directly above them. Therefore, to apply a percentage discount to more than one line item, you first enter a Subtotal item then enter the Discount item.
There is several other item types used in QuickBooks, including Sales Tax Items, but in terms of our discussion regarding two-sided items, the above definitions should be sufficient.
Items versus Expenses
Because items are required on sales forms, QuickBooks users will capture all revenue data using items. But when it comes to expenses, the use of items may not be as common.
QuickBooks allows you to post directly to the Chart of Accounts using the Expense tab on checks, bills and credit card transactions, instead of entering items. This means you are not using Items to track expenses consistently. But if you want reports to show item profitability for products and services, you must use Items to track both purchases and sales.
Inexperienced, or unaware, users of QuickBooks may think they need to setup one item to record their revenue transactions and another item to record their purchase (expense or costs) transactions. Unfortunately, this is a mistake that still results in erroneous profitability reporting.
This is where two-sided items come into play.
Don’t ask me why, but a long time ago Intuit decided not to make two-sided items the default configuration for Service, Non-inventory Part, Other Charge and Assembly Items.
Who knows why they chose such bewildering language within the Item setup to turn on two-sided configuration. The combination of these two factors has greatly contributed, in my opinion, to the proliferation of improperly setup QuickBooks files.
So, what do we mean when we speak about a two-sided item?
Well, we mean you can use the same item on both a purchase form to record the cost information to an expense (or COGS) account, and also use it on a sales form to recover revenue information to an income account.
In order to clearly understand the concept of two-sided items, it’s best to look at a single-sided item. So we’ll be using a QuickBooks Non-inventory Part Item (default) setup as our example. Below is the “New Item” window for such an item:
QB New Non-inventory item
By default, QuickBooks wants you to record the Item Name/Number, a Description, a Price, Tax Code and Account. Everything else is optional. Because of the terminology involved, specifically the use of the word “Price,” you would think this item is for the sales or revenue side of the business. As such, you might set the account to “sales.”
You’d then turn around and purchase products, not using this item, but by recording an expense for a Vendor Bill or writing a check assigning either an expense or cost account.
But I’m telling you plain and simple, that’s wrong.
I’m going to give you an example of why, and then show you how to fix the problem.
Let’s say you sell custom blinds. You don’t actually stock, make or manufacture anything, you simply help customers pick out the correct blinds, insure the measurements for the window openings are correct, and then place an order for the custom blinds with a manufacturer.
When the blinds come in, you call the customer and they pick them up.
You must bill the customer – perhaps using a sales receipt at the time they pick up the blinds or perhaps send an invoice to be paid at a future date for the custom blinds you purchased.
You want to make certain you charge enough to not only cover the cost of the blinds, but also your time and overhead, as well as a reasonable profit. You have predetermined that you want to “mark up” your sale price by 60 percent over your cost.
For our purposes here, we’re going to say a specific blind in a size of 57-1/2-inches by 81-1/2-inch and costs $468.63. So, you plan to charge $749.81. Let’s set up the default Non-Inventory item:
DON'T MAKE THE MISTAKE OF SETTING UP 1-SIDED ITEMS.
1-sided Non-inventory Item
Note that we didn’t capture the cost anywhere. If I try to use this item for purchases, two odd things occur. First the cost defaults to my sale price, because I haven’t captured cost anywhere. Second, I may receive a warning from QuickBooks advising me that the item is associated with an Income Account and not a cost or expense account (shown below):
YOUR DATA WILL BE WRONG USING A 1-SIDED ITEM IN THIS WAY...
Vendor Bill with 1-sided Item
Sure enough, if I use this Item in this manner, my costs even when I correct the amount will be offset against my Income Account and not be properly recorded as either a Cost of Goods Sold or Expense.
What we need is a Non-inventory Part Item that will capture both our revenues and our costs. Fortunately, there is a two-sided option.
If we go back to our Item and make one click, we can turn our single-sided item into a two-sided item. The red arrow in the illustration below shows the magic click – click the check box labeled, “This item is used in assemblies or is purchased for a specific Customer: Job”:
Just click the 'magic box' to turn 1-side into 2-sides.
Make 1-sided item 2-sided
When you check the box, which reads differently for each type of item, the one-sided item immediately becomes a two-sided item (shown below):
You have just a little more editing to do, to fix it.
Incomplete 2-sided Item
Because I already had setup this item, only the revenue (right) side of the item is fully completed. The purchase (left) side still needs to be completed (shown below):
This way you capture both revenue and expense.
QB 2-sided Non-inventory Item
When I attempt to save these changes, QuickBooks will display another warning message, because I’ve already used the Item in prior transactions:
Be careful in making your selection...
Item change history warning
You have a choice to make. You can either leave your past transactions posted exactly as they are, and simply make the change to the item accounting on a “going forward” basis. Or, you can update all prior transactions. Clicking Yes will change all of your prior financials. And it could have tax implications.
At the very least, if you decide to update your data, you need to make a backup of your QuickBooks file and print reports before making the change.
Now my Vendor Bill reflects the correct information:
Corrected Vendor Bill
And my Sales Receipt to the Customer reflects the correct information:
Sales Receipt is Correct
And my Item Profitability Report reflects the correct information:
Same item has both cost and revenue.
Item Profitablity reflects both sides
All because my items are setup as two-sided now.
You can setup two-sided Service items for use on sales, purchase and time-tracking forms (only Service items can be used on time-tracking forms). Setting up Service items this way also is valuable when invoicing for services as well as needing to track subcontractor expenses.
In the case of Service Items the checkbox reads, “This service is used in assemblies or is performed by a subcontractor or partner.”
You also can set up Other Charge items as two-sided to track things such as shipping costs separately from revenue or reimbursements for those charges. For Other Charge items the checkbox reads, “This item is used in assemblies or is a reimbursable charge.”
Just remember, even though QuickBooks items default to a one-sided configuration, it always is best practice to make the items two-sided. You won't be “going blind” as far as your item profitability is concerned any longer. And you might just find yourself saying, “With two-sided Items, everything is made in the shade.”