Cost Of Goods Sold

Understanding and Troubleshooting Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) represents the direct cost of producing or purchasing the goods your business sells. In QuickBooks Online, this account is crucial for calculating gross profit accurately. Because COGS is impacted by how you set up items, record purchases, and process sales, discrepancies can occur for several reasons.

This guide explains how COGS works in QuickBooks Online and how to resolve common reporting issues.

How QuickBooks Calculates COGS

QuickBooks Online uses the Average Cost method to track inventory value. This is an IRS-accepted method where the cost of goods is averaged out whenever you purchase new inventory. When you sell an item, QuickBooks calculates the cost based on this average and records that amount in your COGS account.

It is important to note that only specific item types impact the Inventory Asset and COGS accounts automatically. Other item types behave differently:

• Inventory Part: These are tracked in the Inventory Asset account when purchased and moved to COGS only when sold.
• Non-inventory parts: By default, these are expensed immediately to a COGS or expense account at the time of purchase. They do not update the Inventory Asset account.
• Service items: These typically do not affect COGS or Inventory Asset.

Troubleshooting COGS Discrepancies

If your COGS account does not match your expectations or your sales records, check the following common causes.

Incorrect Item Setup or Cost

The most common reason for inaccurate COGS is how items are set up or entered.

• Review Item Types: Ensure items you intend to track as inventory are set up as “Inventory” types. If they are set up as “Non-inventory,” they are expensed immediately upon purchase, which can inflate COGS before the item is even sold.
• Verify Item Costs: Check the “Cost” field in your product/service list. If the cost was entered incorrectly, or if a cost was entered after a sale was already made, your reports will reflect inaccurate data.
• Double-Sided Items: If you use non-inventory items, ensure you understand if they are set up as “double-sided.” If you enter a purchase using these items, the cost posts to the expense account selected. When you sell them, the sales price posts to the income account. You can verify this by opening an invoice or bill and pressing Ctrl + Y (or Cmd + Y on Mac) to view the Transaction Journal.

Adjusting Inventory Value

If your physical inventory count does not match what is in QuickBooks, you need to adjust your records.

• Use Inventory Adjustments: The correct way to adjust inventory levels and value is to use the Inventory Adjustment feature. Go to the Products and Services list, select the item, and choose “Adjust Quantity/Value on Hand” (often found under the “Action” column or within the inventory workflow).
• Avoid Journal Entries: Never use a journal entry to adjust inventory or the Inventory Asset account. Manual journal entries do not update the item quantity on hand or the per-unit average cost, which creates larger discrepancies in your books.

Purchase Orders and Bills

The way you record purchases affects how costs are categorized.

• Use Item Details: When creating a Purchase Order (PO) for inventory, always use the Item details section of the form, not the Category or Account details section. If you select an account (like COGS or Expense) directly on a PO line, it bypasses the inventory tracking system.
• Vendor Deposits: Customer deposits should generally be recorded as a liability (e.g., “Unearned Income” or “Customer Deposits”), not as income or COGS. If a deposit is showing in COGS, check the account used on the receipt or payment transaction.
• Vendor Discounts: If you receive a discount from a vendor (e.g., for early payment), enter the actual net amount paid. Do not record the discount as a separate negative expense or COGS entry; simply record the payment for the reduced total.

Integration with Point of Sale (POS)

If you use QuickBooks Point of Sale with QuickBooks Online, discrepancies can arise due to sync issues:

• Account Mapping: Ensure Point of Sale is mapped to the correct QuickBooks Online COGS account.
• Deleted Transactions: If a transaction was sent to QuickBooks but later deleted in QuickBooks, the POS records will no longer match.
• Failed Financial Exchange: If a receipt was marked as “Sent” in POS before the Financial Exchange successfully completed, the data may not have transferred.

Viewing the Details

To understand exactly how a transaction is affecting your COGS:

1. Open the transaction (Invoice, Sales Receipt, or Bill).
2. Select More at the bottom, then choose Transaction Journal.
3. Review the debits and credits to confirm which accounts are being impacted.

If you continue to see issues with your General Ledger or specific transactions not appearing, ensure you are using a supported browser, such as Google Chrome, for the best experience with QuickBooks Online.