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CharlieB65
September 6, 2023
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Non Inventory Items as COGS - for a young entrepreneur

  • September 6, 2023
  • 2 replies
  • 0 views

Hi,  I've suggested my daughter to start utilizing QBO for her business activities.

 

Business:

*. She sells high end fashion for women utilizing Instagram to elicit her 10,000 followers to purchase the short lived deals.

*. My daughter starts by locating her deals for the next hours online in many sites all over the world.

*. She posts on Instagram the deal that indicates the price.

*. AFTER a person contacts her and decides to purchase an item advertised on her Instagram account, the buyer receives a link to pay for a percentage (downpayment) for the garment.

*. After downpayment is received, she then purchases the item with a credit card.

*. When the garment arrives to her central location, the customer is contacted via the Instagram account and requests the final payment to cancel the price agreed.  The garment is inspected, re-packaged and then gets shipped all over the world.

 

When the transaction gets confirmed, by receiving the downpayment, my daughter utilizes QBO to create an Invoice entering the unique item as a NON-INVENTORY item.   She indicates in the system the price and the income account (Sales-retail IG), marks the items as being purchased from a supplier, list the COST and the EXPENSE ACCOUNT.  The first doubt arises as to the correct Expense account either as Purchases or Cost of Sales.

 

How should she register what she pays for the items she acquires from the vendors?, as everything is being paid by a credit card and not an open account.  Should she use a Bill and apply the payment via a Credit Card, for all practical purposes the payment is due inmediately (when she purchases online).

 

When she runs a PROFIT and LOSS the costs are not reflected! neither PURCHASES, therefore the report is useless without COGS or Expenses...

 

She doesn't have an inventory, because each day are new and distinct items.  Makes no sense in keeping an inventory of the items that are short lived and unique.

 

On a final note, she doesn't do drop shipment because of the way her business is run, although more expensive it has more added value for her customers.

 

Your expertise on how to handle this situation is greatly appreciated!  have a great day!

 

C.

Best answer by Rainflurry

@CharlieB65 

 

This sounds like a great experience for both of you.

 

1) "When the transaction gets confirmed, by receiving the downpayment, my daughter utilizes QBO to create an Invoice entering the unique item as a NON-INVENTORY item. She indicates in the system the price and the income account (Sales-retail IG), marks the items as being purchased from a supplier, list the COST and the EXPENSE ACCOUNT. The first doubt arises as to the correct Expense account either as Purchases or Cost of Sales." 

 

IMO, the down payment from the customer should be recorded as a payment received (New > Receive payment) under the customer's name.  There's no need to create an invoice at this point since there is no sale until the garment is shipped to the customer.  Recording the down payment as a payment received creates a credit for the customer that can be applied to the invoice created when the garment is shipped. 

 

Technically, these items are considered inventory from the IRS's perspective.  However, they can be recorded under Material and Supplies expense in this case using the Exception for Small Business Taxpayers.  So, IMO, the correct account to use to expense the cost of the garments is Materials and Supplies.  You can use Cost of Sales if you prefer.  Either way, they are being expensed at the time of purchase.

 

2) "How should she register what she pays for the items she acquires from the vendors?, as everything is being paid by a credit card and not an open account. Should she use a Bill and apply the payment via a Credit Card, for all practical purposes the payment is due immediately (when she purchases online)."

 

You can enter it as an expense (New > Expense) and use the credit card as the payment account.  Entering a bill and then paying it with the credit card on the same day is unnecessary and the end result is the same.

 

3) "When she runs a PROFIT and LOSS the costs are not reflected! neither PURCHASES, therefore the report is useless without COGS or Expenses..."

 

If the purchase is recorded as an Expense (see #2), it will show on the P&L.

 

Finally, when she receives the garment from her vendor, she can create the invoice for the non-inventory item, apply the credit from the down payment, leaving the balance due from the customer.

2 replies

K
Kurt_M
September 6, 2023

We're delighted to have you in the Community space today, @CharlieB65.

 

Before anything else, we'd like to take this opportunity to thank you for introducing QuickBooks Online (QBO) to young entrepreneurs. Also, it's great that you've added a complete detail of the situation that you're currently in. This way, we'll be able to provide concise information to help you get through this and enjoy the program.

 

In QBO, you can create a new account for the mode of payment that you prefer when your customers are ready to pay for their ordered products. We'll gladly write down the steps to get you going:

 

  1. Access your QuickBooks Online company.
  2. On the left navigational bar, go to the Accounting tab.
  3. Click the New button, and then select Credit cards.
  4. Add all the details needed.
  5. Once done, click the Save button.

 

To address how she should register what she pays for the items she purchased from her vendors, she can enter it as an Expense inside the program. Through this method, she can easily manage real-time payments. We'll gladly write down the steps below:

  1. Access your QuickBooks Online company.
  2. On the left navigational bar, click the +New button.
  3. Under Vendors Column, select Expense.
  4. Add the needed details and then once done, click the Save and close button.


Feel free to visit this article for more information: Enter and manage expenses inside QBO.

With regards to what account to use for the items. it's best to consult an account so they can provide the convenient way on how to handle it. If you don't have an accountant, we can help you find one. Feel free to visit this page to find an accountant for your business: Find a QuickBooks ProAdvisor.

 

You may also check this page to learn more about the account types and chart of accounts inside QBO: Learn about account types and detail types in QuickBooks Online.

 

In addition, we've got these articles to help you manage payments, ensure your data stays accurate inside the program, modify and keep the current report settings, as well as managing accounts inside COA:

 

 

@CharlieB65, we've got your back if you have any additional QuickBooks-related queries. Feel free to visit the Community space and rest assured. We'll get back to you as soon as possible. Take care, and have a nice day!

Rainflurry
RainflurryAnswer
September 7, 2023

@CharlieB65 

 

This sounds like a great experience for both of you.

 

1) "When the transaction gets confirmed, by receiving the downpayment, my daughter utilizes QBO to create an Invoice entering the unique item as a NON-INVENTORY item. She indicates in the system the price and the income account (Sales-retail IG), marks the items as being purchased from a supplier, list the COST and the EXPENSE ACCOUNT. The first doubt arises as to the correct Expense account either as Purchases or Cost of Sales." 

 

IMO, the down payment from the customer should be recorded as a payment received (New > Receive payment) under the customer's name.  There's no need to create an invoice at this point since there is no sale until the garment is shipped to the customer.  Recording the down payment as a payment received creates a credit for the customer that can be applied to the invoice created when the garment is shipped. 

 

Technically, these items are considered inventory from the IRS's perspective.  However, they can be recorded under Material and Supplies expense in this case using the Exception for Small Business Taxpayers.  So, IMO, the correct account to use to expense the cost of the garments is Materials and Supplies.  You can use Cost of Sales if you prefer.  Either way, they are being expensed at the time of purchase.

 

2) "How should she register what she pays for the items she acquires from the vendors?, as everything is being paid by a credit card and not an open account. Should she use a Bill and apply the payment via a Credit Card, for all practical purposes the payment is due immediately (when she purchases online)."

 

You can enter it as an expense (New > Expense) and use the credit card as the payment account.  Entering a bill and then paying it with the credit card on the same day is unnecessary and the end result is the same.

 

3) "When she runs a PROFIT and LOSS the costs are not reflected! neither PURCHASES, therefore the report is useless without COGS or Expenses..."

 

If the purchase is recorded as an Expense (see #2), it will show on the P&L.

 

Finally, when she receives the garment from her vendor, she can create the invoice for the non-inventory item, apply the credit from the down payment, leaving the balance due from the customer.

C
CharlieB65Author
September 7, 2023

Thank you very much for your response!

 

She creates an invoice to be able to keep control of what is being purchased by a customer, since she doesn't purchase anything from vendors unless the customer makes a cash or credit card advance (usually 50% of the price).  These cash advances are recorded in the invoice created for the sale.  It would be very difficult to make an invoice when the garment arrives since she is processing too many packages on a daily basis.  I agree with you that it would be elegant just to record the cash advance from the customer separately and apply it to an invoice.  Things can become a bit complex as sometimes the vendor does not ultimately ship the products for any reason or the whole order to a vendor gets cancelled.

 

As to record the garments purchases as non inventory, she is taking them as purchases.  These purchase orders for every day to a particular vendors are created but paid immediately with a credit card.  By doing it this way, they appear as purchases under cost of sales.  The trace for the transactions seems to be more clear and robust.

 

One thing I haven't figured it out is how to void an entire invoice that has received a cash advance.  Will she then have to issue a cash reimbursement via the same way the customer advanced the cash (most likely via a credit card).  I can see that a credit one can issue a refund receipt, but cannot issue a refund of an invoice with cash advance directly.  Any suggestions?

 

You are spit on as to creating a Bill instead of a Purchase Order, she would save one step.

C
ChristieAnn 11
September 7, 2023

Welcome to the QuickBooks Community, CharlieB65.

 

I just wanted to let you know that my colleague responded to your other post. In order to keep the conversation streamlined and provide you with the best resolution, I'll ask that you post any follow-ups there.

 

Just in case you haven't been notified of the new response, here's the link: https://quickbooks.intuit.com/learn-support/en-us/reports-and-accounting/how-do-i-cancel-an-invoice-with-cash-advance-from-the-customer/01/1312498#M194912

 

I'll be here every step of the way. As always, you can reach out to the QuickBooks Community anytime you need a helping hand. Take care always, CharlieB65.

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