Tying Items to the Chart of Accounts (Part 2)

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Last week we began this portion of our Inventory series by looking at proper categorization and accounting for Inventory Items, Inventory Assemblies and Service Items. We examined the role of the various Inventory Asset Accounts like Raw Materials, WIP and Finished Goods, along with the related Income and Cost-of-Goods-Sold accounts. We learned that setting-up items properly and mapping them to the proper chart-of-accounts is essential for the long-term financial reporting required by inventory-centric businesses.

In today’s installment we want to examine some of the other Item types and look at some of the other mapping and configuration details associated with the use of QuickBooks for inventory management.

Non-inventory parts and Other Charge items

There are a couple of more item types that QuickBooks uses which are common to almost all businesses, and especially those performing work associated with the consumption of products as part of their operations. Non-inventory (N/I) parts and Other Charge type items are commonly used by businesses that require parts not routinely held in stock, or more complex services, many times performed by sub-contractors.

These item types are normally used for items that do not need to be counted or for other service types of charges, like freight. Exactly like QuickBooks Service type items, which we looked at last time, the little box in the item record must be checked to allow for both purchase and sales accounts to be used in tracking these items.

Be aware, ‘Other Charge’ items do not allow for a ‘unit of measure’ for specifying the unit on a document, but are normally expressed as the value of the charge. This is why pre-established costs and sale prices may not be established for this item type. In contrast, non-inventory parts can have a Unit-of-Measure designations (as shown below). 

You should be aware that something odd occurs within QuickBooks when Non-inventory parts are included in assemblies. In such cases, you will see ‘negative COGS’ appearing on the financial statements when the purchase of the raw material is done at a different time than the build of the assembly. This is because the purchase of the material creates an immediate COGS posting (debit). When an assembly build is performed, the item is credited to COGS to reverse out the purchase cost and is rolled into the cost of the finished good assembly. 

Mapping the items to the accounts

Once the accounts are setup, it’s a simple matter of applying the accounts to the items. You can do this first in a spreadsheet, and then transfer (‘cut and paste’) the list using the, ‘Add/Edit Multiple List Entries,’ window in QuickBooks under Lists.

Once the items are in, you can review the account mapping in the Item Listing report. This is found by either going to the Item List window and clicking Reports => Item Listing at the bottom of that screen, or by going to Reports => List => Item Listing in the main drop-down.

Customize this report to include the three necessary accounts: Asset Account, Cost of Goods Sold and (Income) Account accounts. Make sure the accounts all match the type for which they were posted.

Cleaning-up account postings

We would all like to be there when the client is first setting up the file, so we can make sure they’re doing it properly. However, a lot of times, we’re called in after the client has been using the file for a while, and the mistakes have been made. What do you have to be careful about?

Running the Item Listing report with the thee inventory-related accounts listed is a great way to spot miss-postings to accounts. Simply follow down the list for each type and match the items to correct account types. However, when you find an error, the solution is not always to simply change the account in the item record.

We’ve probably all seen this 'Account Change' action-confirmation window when attempting to change an account associated with an item:

This is one of those windows in QuickBooks that I wish would flash up a red stop sign with the words, "WARNING, WARNING Will Robinson!" (forgive my ‘Lost in Space’ reference), followed by about four windows asking, ‘Are you sure you want to do this?’

The casual user will normally just hit Enter on their keyboard causing ALL the transactions that ever used this item to be changed. If this is a very old file and the item was used in transactions during prior period tax years, the financials for those years will be changed, overriding the ‘date lock’ in the process. (The only way to ‘fix’ this is to re-enter the wrong account again and select ‘Yes’).

I wish this window had a date that the user could select to affect the changes in the account.  When the user selects Yes or No to this window, the effect hits everything prior and all transactions moving forward. You cannot, for example, say I want to change the account posting as of January 1st for this year since the taxes were filed for last year, and I want the accounts to be correct for this year, if the current date is September 1st.  The change will affect all, or none, of the transactions in the past.

In reality, much of inventory cleanup is simply the result of clients and their advisors not properly setting up the item account mapping in the first place. A lot of time can be saved, and accurate financials generated, if the preparers would just take the time to work with management to find the right Chart-of-Account mapping for each of their items.

With these item basics behind us, we can continue on with our inventory-centric installments of this series. I look forward to your tuning in during the weeks to come for each of my contributed articles.