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T
tyler@mattesonhe
September 2, 2024
Question

Why is an inventory item being expensed to the cost of goods account before the item is sold on a cash basis profit and loss?

  • September 2, 2024
  • 1 reply
  • 0 views
For example, I purchase an inventory item for $2000 this year. The item shows up in the asset account as it should but also shows as an expense in the associated cost of goods sold account on a cash basis profit and loss before the item is sold. The item is setup as an inventory item and linked to the proper asset, expense, and income accounts. On an accrual basis profit and loss the item is not expensed, as it should be. Why is qbo expensing an unsold item before it is sold?

1 reply

R
Rasa-LilaM
September 2, 2024

I’d like to help clarify how QuickBooks Online (QBO) manages inventory on cash basis accounting, Tyler.

 

On a cash basis, in a Profit and Loss report, expenses are recognized when they're paid, not when the inventory is sold. On an accrual basis, we recognize COGS solely at the point of sale for the products.

 

For more information on how cash and accrual basis affect reports, check out this link: Choose between cash and accrual accounting methods in QuickBooks Online.

 

Feel free to explore the links below for a detailed look at your inventory transactions and the effect of inventory tracking on your financial statements:

 

Fill me in if you have other inventory or QuickBooks-related concerns or questions. We'll get back to make sure everything is taken care of for you.

T
tyler@mattesonheAuthor
September 4, 2024

Regardless of cash or accrual, shouldn't the value of the inventory item sit in an asset account until it is sold?  if an item is in inventory, I would think it doesn't show on the P&L in the expense or income account until it is sold?

FishingForAnswers
FishingForAnswers
September 4, 2024

@tyler@mattesonhe  Technically speaking, Cash basis doesn't even use Inventory.

 

You can't both recognize an expense when it is paid, and treat it as something that hasn't been expensed yet.

 

There's a reason Cash basis is generally used only by small businesses.

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