Setting Up Items the Right Way: Service and Non-Inventory Items
One of most common problems in QuickBooks data files is the result of incorrectly set up items. Items handle the behind the scenes accounting in QuickBooks, automatically posting transactions to your financial statements. If they are not set up correctly, your financial statements won't be correct. So in this month's article, we talk about how to correctly set up the two most common item types, Service and Non-Inventory Items.
Before we dig in, a quick refresher. QuickBooks items are things that you sell; all sales transactions (estimates, sales orders, invoices, sales receipts) require at least one item. Purchase transactions (checks, credit card charges, vendor bills) have two tabs on the bottom half of the transaction screen and give you the option of using either an item or an expense account.
The general rule of thumb in QuickBooks is: If you buy something for resale to a customer, use an item on your purchase transaction; if you buy something for your own internal use, use an expense account on your purchase transaction.
You will find the Items list on the Lists pull-down menu or in the Company section of your Home Page. The item list can be sorted by clicking on the column headers and you can customize the columns that you see from either the menu that pops up when you right-click or from the menu the opens when you click on the Item button at the bottom of the screen.
When you open the New Item dialogue box, it looks like this:
The first step is to select an item type. Service items are intended to be used for services that you sell and/or subcontract with someone to provide on your behalf. Non-Inventory parts are intended to be used for goods that you buy for resale but for which you don't have a need to track the on-hand quantities.
Here's a secret: Service Items and Non-inventory parts behave exactly the same way in QuickBooks. The only difference between them is that they are grouped and sorted separately on sales reports.
Next, enter your item name. Short and unique item names are generally the best bet. Sales forms can be customized to show just the description, and using short, unique names will reduce the number of keystrokes required to enter items. Use sub-items to group similar items together. See Organizing QuickBooks Items in our September 2010 issue for more information on this.
Select your Unit of Measure if you are using one.
Now we come to the heart of the problem. It's that little check box that says "This service is used in assemblies or performed by a sub-contractor or partner." If you are setting up a Non-Inventory part, it says "This item is used in assemblies or is purchased for a specific customer:job." Most people find this language confusing and they ignore the checkbox. However, here's what happens when you check it.
The item changes from what I refer to as a single-sided item to a double-sided item. The problem with single-side items is that you can only assign one account from your chart of accounts. If you assign an income account, your sales transactions will be correct, but if you use this same item on purchase transactions, they will not be correct. There is a little warning that pops up if you use an item associated with an income account on a purchase transaction, but most people simply turn it off.
If you purchase anything at all for resale, my very strong recommendation is that you make every item a double-sided item. If you have items that are used for job costing and you do not want them used on sales transactions, put "DO NOT SELL" in the Sales description.
On the Purchase side, the Cost that you fill in here will appear on Purchase Orders, Vendor Bills, Credit Card Charges, and Checks as well as in the cost field on estimates. You can leave it blank in the set up or type over it on the forms. Select an Expense (or Cost of Goods Sold) Account. If you create purchase orders from Estimates or Sales Orders, you may want to add a preferred vendor.
On the Sales side, the Price that you fill in here will appear on Estimates, Invoices, Sales Orders, etc. Again, you can leave it blank in the set up or type over it on the form. Select a tax code if appropriate and an Income account.
You can troubleshoot your own item list by customizing the columns to show the COGS Account. Verify that your items are double-sided and have an Income Account in the Account column and a Cost of Goods Sold or Expense account in the COGS Account column. You can also find problem transactions by running a P&L and double-clicking on the Total Income. If you see transactions from Bills, Checks, or Credit Card Charges, you should investigate to see if an item was used improperly.
If you do find a problem and need to change the account associated with an item, you will get a prompt asking if you would like to change the account associated with previous transactions as well. Be very, very careful. If you answer yes to this question, you may impact closed accounting periods. In most instances, it is better to manually correct the individual transactions.