Recording items that you pay for up front

Okay, you just bought three porcelain chickens in the bazaar at Marrakech, and now you want to add them to your inventory and record the purchase. How do you record inventory that you paid for over the counter? By using the Write Checks window, of course, the same way you record any other bills you pay for up front. Just make sure that you fill out the Items column as I describe in Chapter 6.

Recording items that don’t come with a bill

What happens if the items come before the invoice? Lucky you — you have the stuff, and you don’t have to pay for it yet. You do have to record the inventory you just received, however, so that you know you have it on hand. You can’t do that in the Write Checks window because you won’t be writing a check to pay for the stuff — at least not for a while. How do you record items that you receive before paying for them? Read on:

1. Choose Vendors ⇒   Receive Items or click the Receive Inventory icon on the home screen, and select the option to Receive Inventory without a bill.

   You see the Create Item Receipts window, as shown in Figure 7-2. This window is similar to the Enter Bills window that I describe in Chapter 6, but it reads Item Receipt. (You see the Enter Bills window again when you receive the bill for items.)

2. Fill in the top part of the window.

   If you want to record items from a vendor who’s already in the Vendor list, click the down arrow and then choose the vendor. If the vendor is a new vendor, choose Add New from the drop-down menu and then, in the New Vendor dialog box that appears, describe the vendor in detail. When you’re done with the New Vendor dialog box, click OK.

   

3. Click the Items tab.

   You need to click the Items tab (at the bottom of the window) only if it isn’t already displayed. It probably is. But the computer book writers’ code of honor and a compulsive personality require me to tell you that there’s another tab — the Expenses tab — and that you could possibly display it instead.

4. Move to the Item column, and type a name for the item.

   Notice the down arrow in the Item column. Click it to see the Item list. Does the item that you’re paying for appear in this list? If so, click it. If not, enter a new item name. You see the Item Not Found message box. Click Yes, fill out the New Item dialog box, and then click OK. (See Chapter 3 for help with describing new items.)

   You may just as well go down the packing slip, entering the items on the Items tab. Make sure that the Items tab accurately shows what’s on the packing slip. And put a brief description of the items in the Memo field because that description may prove to be useful later, when you want to match up your item receipt with the bill. When you finish, the Create Item Receipts window should look something like Figure 7-2.

5. Provide quantity and cost, as follows:
   • Qty column: Describe the quantity you received.
   • Cost column: Describe the item unit cost. If the item unit cost you enter represents a change, QuickBooks asks whether you want to update its standard item cost (as stored in the Item list) and whether you want to update your standard price for the item.

6. Click the Save & New button or the Save & Close button to record the items that you just received.

   The items are officially part of your inventory. The item receipt has been entered on the Accounts Payable register. Not only that, but also, you’re all ready for the bill when it comes.

Paying for items when you get the bill

The items arrive, and you fill out an item receipt. Three weeks pass. What’s this in your mailbox? Why, it’s the bill, of course! Now you have to enter a bill for the items that you received three weeks ago. This job is easy:

1. Choose Vendors ⇒   Enter Bill for Received Items.

   Or, on the home screen, click the Enter Bills against Inventory icon. If you’re in the Vendor Center, click New Transactions and then click Enter Bill for Received Items. The Select Item Receipt dialog box appears, as shown in Figure 7-3.

2. Click the Vendor drop-down menu, and choose the name of the vendor that sent you the bill.

   You see one or more item receipts in the box. For each receipt, you see the date you put on it, its reference number, and the memo that you wrote on it.

3. Select the item receipt for which you want to enter a bill and then click OK.

   The Enter Bills window appears, as shown in Figure 7-4. Does this information look familiar? It should: It’s the same information that you put in the Create Item Receipts window, only now you’re working with a bill, not a receipt.

4. Compare the Items tab in the window with the bill.

   Are you paying for what you received earlier? Shipping charges and sales tax may have been added to your bill. You may also need to adjust the price because you may have been guessing when you recorded receiving the items. If so, add to and adjust the original receipt information by using the Items tab. (You can click the Recalculate button on the ribbon to add the new items.)

   

   

   How many days do you have to pay this bill? Is it due now? Take a look at the Terms line to see what this vendor’s payment terms are. Change the payment terms if they’re incorrect by choosing a different entry from the drop-down menu.

   You want to pay your bills at the best possible time, but for you to do so, the terms in the Enter Bills window must match the vendor’s payment terms.

5. Click Save & New or Save & Close to record the bill.

   You still need to pay the vendor’s bill, of course. Fair enough. Take a look at Chapter 6 if you need help.

Recording items and paying the bill all at once

Suppose that you receive the bill when you receive the goods. The items are unloaded from the elephant’s back, and the elephant driver takes a bow and hands you the bill. Here are the steps you follow:

1. Choose Vendors ⇒   Receive Items and Enter Bill.

   Or, on the home screen, click Receive Inventory and then select the Receive Inventory with Bill option there. Or, in the Vendor Center, click New Transactions and then click Enter Bill for Received Items. You see the Enter Bills window (refer to Figure 7-4). If you’ve been reading this chapter from its beginning, you’re familiar with this window, and you know exactly what it is and what it does. If you landed cold turkey on this page by way of the index, you need to know, for inventory purposes, how to record the items you’re paying for.

2. Fill out the top part of the window.

   This stuff is pretty basic. Choose a vendor from the drop-down menu, and make sure that the vendor’s terms for paying this bill are shown correctly. If this vendor is new, choose Add New. QuickBooks asks you to fill in an information dialog box about the vendor. Do it. Make sure that you fill out the Bill Due line correctly.

3. Click the Items tab, and list all the items that you’re paying for.

   To see the Item list, move the cursor to the Item column, and click the down arrow that appears. Make sure that the quantity and cost of the items are listed correctly on the Items tab.

4. Click Save & New or Save & Close.

   QuickBooks adds the items you listed to the Item list and makes them official parts of your inventory.

Customizing a purchase order form

QuickBooks allows you to customize your PO form, working from scratch to create a new PO form or working from an existing PO template.

To create a “from scratch” PO form, choose Vendors ⇒   Create Purchase Orders, and click the Customize Design button on the Formatting tab of the resulting dialog box. QuickBooks displays an Intuit web page that walks you through the steps to creating your own highly customized form.

To customize an existing PO form, choose Vendors ⇒   Create Purchase Orders and then click the Customize Data Layout button on the Formatting tab of the resulting dialog box. QuickBooks, in this case, prompts you to make a copy of the purchase order form and then displays the Additional Customization dialog box (not shown), which supplies buttons and boxes that you can use to modify the standard QuickBooks PO form so that the data you want appears and is labeled the way you want.

The Additional Customization dialog box provides a Preview area you can use to see what your changes look like and a Cancel button you can click if things get terribly out of hand. Furthermore, the Additional Customization dialog box provides a Layout Designer button, which you can click to open the Layout Designer window. The Layout Designer window allows you to become a true layout artist and make all sorts of changes in your PO simply by moving fields around the page with your mouse.

The Manage Templates button, also available on the Formatting tab, lets you choose the PO form you want to customize when you’ve previously created more than one form.

Filling out a purchase order

Perhaps you’re running low on gizmos, doohickeys, or some other items on your Item list, and you’re ready to reorder these things — whatever they are. Follow these steps to fill out a PO:

1. Choose Vendors ⇒   Create Purchase Orders.

   You could also click the Purchase Orders icon on the home screen, or click the New Transactions area of the Vendor Center and then select Purchase Orders. You see the Create Purchase Orders window, which is similar to Figure 7-5. Note that the exact details of this window depend on how you customize your PO form.

   

2. Choose a vendor from the Vendor drop-down menu.

   Click the down arrow to see a list of your vendors. Click a vendor to see its name and address in the Vendor box. If you can’t find the name of the vendor on your menu, choose Add New from the menu and then fill in the information about the vendor in the resulting New Vendor dialog box. Click OK when you’re done with the dialog box.

3. If you track your inventory by class, choose a class from the Class drop-down menu.

   The Create Purchase Orders window may not have a Class drop-down menu. If it doesn’t, and you want it to have one, you have to set up QuickBooks to track expenses by class. To do so, open the QuickBooks file in single-user mode as the administrator. Then choose Edit ⇒   Preferences, and click the Accounting icon in the list on the left. (You may also need to click the Company Preferences tab.) Finally, select the Use Class Tracking check box and click OK.

4. (Optional) Select a Rep, an Expected Date, and a FOB (free on board; see Chapter 4) if you’re using them on your PO.

   You may have to fill in other fields before you get to the item-by-item descriptions at the bottom. Again, these fields may not appear if you haven’t indicated that you want them on your form.

5. Move to the Item column, and start entering the items you’re ordering.

   Entering the items is the most important part of creating a PO. When you move into the Item column, it turns into a drop-down menu. Click its down arrow to see the Item list. You may need to scroll to the item that you want to enter. A fast way to scroll to the item is to type the first few letters of the item name. If you type the name of an item that isn’t on the Item list, QuickBooks asks whether you want to set up this item. If so, click Set Up and then fill in the New Item dialog box.

   Enter as many items as you want in the Item column. QuickBooks fills in an item description for you, but you can edit whatever it puts in the Description column, if need be. In the Qty column, indicate how many of each item you need.

6. If you want to, fill in the Vendor Message field — but definitely fill in the Memo field.

   The Vendor Message field is where you put a message to the party receiving your order. You could write Get me this stuff pronto!

   No matter what you do, be sure to fill in the Memo field. What you type in this field appears in the Open Purchase Orders dialog box, and this info is the surest way for you to identify what this PO is for. Enter something meaningful that you can understand two weeks, three weeks, or a month from now, when you pay for the items that you’re ordering.

   At the top of the Create Purchase Orders window (on the ribbon) is the Print Later check box, which tells you whether you want to print this PO. If you want to print the PO, make sure that this check box is selected. After you print the PO, the check mark disappears from the box.

7. Click Print to print the PO.

   If this PO is one of many that you’ve been filling out, and you want to print several at once, click the arrow below the Print button and choose Batch from the drop-down menu. Before you print the PO, however, you may want to click the down arrow below the Print button and choose Preview to see what the PO will look like when you print it. QuickBooks shows you an onscreen replica of the PO. I hope it looks okay.

   You use the History button after you receive the items you’ve so carefully listed on the PO. After you receive the items and record their receipt, clicking this button tells QuickBooks to give you the entire history of an item — when you ordered it and when you received it.

   As for the other buttons at the top, I think that you know what those are.

8. Click Save & New or Save & Close to record the PO.

   QuickBooks saves the PO and displays a new, blank PO window in which you can enter another order.

Checking up on purchase orders

You record the POs. A couple of weeks go by, and you ask yourself, “Did I order those doohickeys from Acme?” Choose Reports ⇒   Purchase ⇒    Open Purchase Orders to see a report that lists outstanding POs. Or click the Reports Center, select Purchases in the left column, click the List view button in the top-right corner to get an actual list of purchasing reports, and then click the Open Purchase Orders report.

Alternatively, you can use the Report Center carousel to page through the reports in a category. To use the carousel, select Purchases in the left column, click the Carousel view button (next to the List view button), and then click the stack-of-reports image that appears to the left or the right of the picture of the selected report.

Receiving purchase order items

After your doohickeys and gizmos have arrived by camel train, you need to record the receipt of the items and add them to your Item list.

The first two things to do are to note whether the stuff came with a bill and then decide how you want to pay for it. These decisions are the same ones that you have to make if you receive goods without having first filled out a PO.

You record PO items that you receive the same way you record other items you receive:

• If you pay for PO items with a check, use the Write Checks window.
• If you receive the PO items without a bill, use the Create Item Receipts window.
• If you receive the PO items with a bill, use the Enter Bills window.

Regardless of the window you’re using, when you select the vendor who sold you the PO items, QuickBooks alerts you that open POs exist for the vendor and asks you whether you want to receive against a PO. Of course you do. (Receive against simply means to compare what you ordered with what you received.) When you click Yes, QuickBooks displays the Open Purchase Orders dialog box, as shown in Figure 7-6. Select the PO(s) that you’re receiving against and then click OK. QuickBooks fills out the Items tab to show all the stuff you ordered. If what QuickBooks shows isn’t what you received, you may have to make adjustments.

Identifying the components

Each component that makes up the assembly — in this example, the St. Valentine’s Day boxed gift set — needs to be an item in your Item list. The assembled item also needs to be an item in your Item list. Chapter 3 describes how to add items to the Item list, so I don’t repeat that information here. But let me just say that if you box up three red coffee mugs with a couple of pieces of tissue paper, you need individual inventory part items for the coffee mugs, the box, and the tissue paper. Then you also need an assembly item that says the gift box includes six red mugs, a red box (say), and also a few pieces of red tissue paper that loved ones can use when they become emotionally overwhelmed by the generosity of this thoughtful gift.

Figure 7-7 shows the New Item dialog box filled in so as to set up a Valentines Box assembly item.

Building the assembly

To build an assembly, choose Inventory ⇒   Build Assemblies. Or, if you’re on the home screen, click the Inventory Activities icon and then choose Build Assemblies in the Company section. QuickBooks displays the Build Assemblies window, as shown in Figure 7-8. All you do is choose the item that you want to build from the Assembly Item drop-down menu and select the quantity that you (or some hapless co-worker) entered in the Quantity to Build text box (in the bottom-right corner). Then click either the Build & Close button or the Build & New button. (Click Build & New if you want to record the assembly of some other items.)

While I’m on the subject, let me make a handful of observations about the Build Assemblies window and the Build Assemblies command:

• In the top-middle portion of the window, QuickBooks shows the quantity of the assembly that you have on hand and for which customers have placed orders. That’s pretty useful information to have, so hey — remember that it’s there.
• The main part of the Build Assemblies window shows you what goes into your product. Not that you care, but this information is called a bill of materials.
• At the bottom of the bill of materials, QuickBooks shows you the maximum number of assemblies you can make, given your current inventory holdings.

  

• When you build an item, QuickBooks adjusts the inventory item counts. In the case of boxed gift sets — each with six red coffee mugs, one piece of wrapping tissue, and a cardboard box — QuickBooks reduces the item counts of red coffee mugs, wrapping tissues, and boxes, and increases the item counts of the boxed gift sets when you record building the assembly.
• Some of the components used in an assembly may not be inventory items. When you use noninventory parts in an assembly, QuickBooks doesn’t care about the item counts.

Manually keep separate inventory-by-location counts

If you have only a handful of items in your little business — say, a few dozen — it’s pretty easy to keep a simple manual running tab on what you have in the Michigan warehouse and what’s in the Chicago distribution facility.

Such a system is very … er, crude. It may just be a couple of sticky notes stuck to your computer monitor. No kidding. Still, it lets you know how much inventory you have (roughly) and where it’s stored. And for some purposes, that works okay.

Use different item numbers for different locations

The embarrassingly crude approach that I describe in the preceding section doesn’t work if you have a lot of items, so the approach won’t work for a multiple-location retailer. Accordingly, if you’re a retailer with a large number of items, I’m sorry, but you probably need to create sets of item numbers for each inventory location. This means a lot more work for you, of course, but it’s really the only practical way to handle your inventory if you have more than a handful of items.

Upgrade to QuickBooks Enterprise Solutions

If you want a really robust approach to inventory management, including the capability to deal with multiple inventory locations, you should consider stepping up to the Enterprise Solutions version of QuickBooks.

QuickBooks Enterprise Solutions effectively deals with situations in which you’re holding inventory in multiple locations and transferring inventory between locations with the Advanced Inventory feature. The Enterprise Solutions of QuickBooks further supercharges inventory management by supporting serial numbers and lot tracking, so businesses can closely track batches of inventory items and even specific items. I don’t discuss the Enterprise Solutions tools for QuickBooks here, but you can read online help if you have the Enterprise version of QuickBooks.

Note: QuickBooks Enterprise Solutions costs considerably more than QuickBooks Pro and QuickBooks Premier. At this writing, QuickBooks Enterprise now has Silver, Platinum, and Diamond levels. For five uses, the entry level Silver is $3,400 per year. Platinum, which adds advanced inventory, is $4,100 per year. The all-in Diamond level is $6,100 per year. You can, by the way, step up the number of QuickBooks Enterprise Solutions users for additional money. Pricing for 30 users is $7,600 for Silver; $8,369 for Platinum; and $8,652 for Diamond. Keep an eye out for first-year discounts.

How periodic inventory systems work in QuickBooks

If you use a periodic inventory system, you set up an Other Current Asset type account called Inventory. Then, whenever you purchase inventory, you categorize the inventory purchase as falling into this fake inventory account. (I’m calling the account a “fake” inventory account because it isn’t a real inventory account to QuickBooks.)

To record your cost of goods sold each month, you use a journal entry to move an appropriate portion out of the fake inventory account and into your cost-of-goods-sold (COGS) account. How do you know what portion you should move? Good question. In a nutshell, you guess based on your historical COGS percentage.

Here’s an example: Suppose that since time immemorial, your COGS has run 45 percent of your sales revenue, and that last month, you sold $10,000 worth of stuff. In this case, you’d figure that 45 percent of $10,000 ($4,500) equals the cost of the inventory that you sold. Accordingly, you’d move $4,500 out of the fake inventory account and into COGS.

Predictably, this rough-and-ready approach means that your inventory and COGS numbers are going to be wrong. So at the end of the year, you still perform a physical inventory count to figure out exactly what you truly hold in inventory. At that point, you’d adjust the inventory and COGS balances so that they match what your physical inventory shows.

It may be that over the course of the year, your rough 45 percent number meant that you moved $5,000 too much from inventory to COGS. In this case, you’d move $5,000 out of COGS and back to inventory. Or you may find that you moved $5,000 too little from inventory to COGS. To fix that problem, you move another $5,000 from inventory to COGS.

A final quick point about using a periodic inventory: As I note in this little discussion, you don’t use inventory items if you’re using a periodic inventory, so what you put on invoices or sales receipts is just a generic, noninventory part item.

The good and bad of a periodic inventory

A periodic inventory system is good for some types of businesses. If you have too many items to track with the QuickBooks Item list, for example, the approach that I describe here can be a life-saver.

Periodic inventory systems create some problems, however. Here are the four biggest and baddest problems in my mind:

• You won’t really know which items are selling well and which aren’t because you won’t be tracking sales by inventory items. This means that you can’t stock more of the hot-selling stuff and less of stuff that’s not selling.
• You won’t know what you really hold in your inventory except when you take that year-end physical inventory. (You won’t know how many dollars’ worth of inventory you’re holding or which item quantities you’re holding.)
• Because you won’t make item-level adjustments based on your physical inventory, you won’t know which items are prone to shrinkage from problems such as theft, breakage, and spoilage.
• You’ll need to make the journal entries that record the dollars moving out of inventory and into COGS. These journal entries aren’t terribly difficult, but they can be a little bit tricky to figure out the first few times.

You need to decide whether you want or need to go with a simpler periodic inventory system in spite of the problems such a system presents. The final thought that I leave you with is this: Many small businesses, especially retailers, use periodic inventory systems successfully.