Setting Up QuickBooks Inventory for the First Time – Part I

Written by Tim Grant

In many ways, Intuit makes QuickBooks so simple and easy to use: enter vendor bills, complete customer invoices, write checks, etcetera, that people rush in to use the product. While that might be fine for some transactions, incorporating inventory into your data file is more like building a house: it takes planning and more of a step-by-step approach to implementation.

Why is the inventory module so much more involved and difficult than, say, reconciling the bank account? I can think of two reasons.

One, inventory affects ALL functional areas of the business, from sales to purchasing to accounting to production to shipping. How someone handles a transaction in their department will most likely result in what someone else does in another area. We call that the workflow process.

Second, more lists come into play as inventory (and manufacturing) move through the transactional pipeline, thus affecting the database. Transactions for items will draw upon vendor and customer information. Items themselves may have anywhere from 10-40 attributes (average cost, price, unit of measure, etc.). The items will go through several transactional stages. In acquisition, for example, items will go from Purchase Orders to Item Receipts to vendor Bills. On the sales side, they go from Estimate => Sales Order => Pick Ticket => Packing List => Invoice. Each one of these pulls in more lists (i.e., customer message), adding to the connectivity of the transactions.

Many new users to the inventory module in QuickBooks rush in just as they would with simple data entry, and only recognize later the problems they have caused. Here is a more systematic approach to setting up inventory for the newcomer.

Lists Are the Foundation

Before even thinking about bringing in the Item List, there are other lists you have to have prepared: the Chart of Accounts, the vendor list, the Units of Measure, and, if using the Advanced Inventory module, the locations and tracking lists. The beauty of QuickBooks is that items are tied to the financial accounts, freeing the end user from the knots of accounting. So, you start with the accounts first, and then connect the items to them in turn.

There are three accounts on the Chart of Accounts (COA) that many inventory items will tie to:

  • An Inventory Asset account on the Balance Sheet,
  • An Income account on the Profit & Loss Statement (a.k.a., Income Statement), and
  • A Cost of Goods Sold (COGS) account, also on the Profit & Loss Statement.

Choosing which of these three accounts to attach to your items is critical for getting effective reporting and accurate financial results.

You turn on the inventory functionality in QuickBooks by the Administrator going to Edit => Preferences => Items & Inventory => Company Preferences tab and clicking on Inventory and purchase orders are active (Figure 1).

Quickbooks inventory preference

Figure 1. Selection for turning on inventory

When this preference is activated, QuickBooks automatically creates the Inventory Asset account as an Other Current Asset type of account on the Balance Sheet. Note that the type is grayed out (Figure 2), meaning it is a default account, and the type cannot be changed.

Inv entory Asset on COA

Figure 2. Inventory Asset account edit screen

Sometimes, additional Inventory Asset accounts might be created depending on how the company needs to track the value of their inventory. For most wholesalers and distributors, one default account is fine (see Figure 3). For a manufacturer, who needs to track Work-in-Progress, multiple accounts may be needed (Figure 4: default account renamed to Materials Inventory).

single Wholesale Inventory Asset account

Figure 3. Typical, single Wholesale Inventory Asset account

Fig 4 - Inv Asset accts for mfg

Figure 4. Alternative Manufacturing Inventory Asset accounts

The Inventory Valuation Summary (IVS) report, which lists all of the inventory part and assembly items in stock, serves as the detail report for the balance(s) in the Inventory Asset account(s). The total of the IVS report and the Inventory Asset accounts serves as a checks and balances that items are being recorded properly on transactions, and should always match.

Next are the Sales or Income accounts. New users frequently make the mistake of creating too many income accounts, sometimes for every product they sell! It is better to create buckets of sales accounts or groups, depending upon your business. Usually just two or three accounts will suffice for product lines. For tracking profitability, see the Item Profitability report under Reports => Jobs, Time & Mileage. Realize that items only tie or connect to one account, so if you sell to multiple channels (i.e., wholesalers and retailers), and you want to track the sales separately, consider using Classes in QuickBooks (see Help in the product on this functionality).

The third account on the COA to set up properly is the COGS account. Again, when you turn on the inventory function in QuickBooks, a default COGS account is created automatically. Like the Sales accounts, you may have reason to create more COGS accounts, such as Freight, but ask yourself why you need the additional accounts? Only do it if you have additional reporting requirements, and remember that each item will only connect to one of these accounts.

The Units of Measure (UOM) list gets more users in trouble than most other lists. This is where users decide what package they are going to receive, stock, or sell their goods in (called Multiple Units of Measure, versus a single unit that is purchased and sold in the same unit). This function is also turned on under Preferences => Items & Inventory. There are several issues to consider regarding setting up the UOM:

  • The base unit of an item is usually the smallest unit received, stocked, or sold. Purchases and sales of the product are usually multiples of the base unit, eliminating the need for fractions of another unit (i.e., case).
  • QuickBooks will only display the base unit on Inventory Stock Status report. QuickBooks cannot track multiple units in stock (i.e., a case and by each) on quantity on hand (QOH) reports.
  • You can set up cross-type units of measure, such as weight and volume, as long as the quantities of these units do not change depending upon the product involved.

The other imperative list to consider before importing items is the vendor list. Most companies already have this compiled and imported into their QuickBooks file. Having the ability to auto-create purchase orders later saves time, but this requires a default preferred vendor for the product. By including an up-to-date vendor list, you save the time of specifying the vendor later.

If you or the client (if you are a bookkeeper) are using QuickBooks Enterprise with the Advanced Inventory function turned on, then two other lists need to be prepared: locations and serial or lot number tracking lists. The locations, or sites, can be prepared ahead of time and added from the Lists dropdown. This is a two-level list where the parent is the Site and underneath the site are bin locations, which can be rows, shelfs, aisles, etc. I will discuss the serial and lot number lists later regarding importing inventory quantities.

The Item List – Types of Items

 Once you’ve completed the ancillary lists, you are ready to tackle the item list. Let’s briefly go over the various item types:

  • Service – Typically used for labor purchased from a vendor or included on an invoice to a customer. Usually only requires an income account if just used for customers.
  • Inventory part – Usually raw material or items for resale where the user wants to track the quantity in stock. The value of these items is stored in the Inventory Asset account until sold on an invoice, when the cost is recognized.
  • Inventory assemblies – A good that is the result of an assembly of components or from a manufacturing process (raw materials). Assemblies include a Bill of Materials (BOM), which is the “recipe” for the finished good. A Build Assembly transaction must take place to remove the components and build the final good which is stocked. In a manufacturing environment, the value of the goods may flow on the Balance Sheet from the materials account, to WIP, to the Finished Goods account. The value of these items is stored in the Inventory Asset account until sold on an invoice, when the cost is recognized.
  • Non-inventory parts – These are usually items that can be expensed at the time purchase, and where the manager doesn’t necessarily track the quantity at any given time. I like to use the example of a bucket of bolts. You might care about how many buckets of bolts you have, but not about how many individual bolts you have. This item can be included on purchase and sales documents.
  • Other Charge – These are not really, inventory items but might be related to inventory, like freight or handling charges. You cannot specify a unit of measure with an “other charge” item.
  • Group items – These are a basket of components that are sold as one item. Only at the time of sale does QuickBooks reduce the quantity of the components. The group item is not kept in stock, thus no quantities of the group items are tracked.
  • The other item types, sales tax, discounts, and payments do not apply directly to inventory.

You must first decide which inventory type your items fall into. Inventory Parts and Assemblies require all three of the accounts mentioned earlier. Service, non-inventory, and Other Charge items may use a purchasing account, a sales account, or both – depending upon whether the item is bought, sold, or both. Group items do not require accounts since the posting is a result of the accounts tied to the components pulled.

About the author

Tim Grant

Tim Grant, MBA, is the President of Business Solution Providers in San Francisco, California. BSP specializes in third-party inventory and manufacturing software products that integrate with QuickBooks. The company provides Needs Assessments to businesses looking for an inventory or manufacturing software solution. Once a choice is made, the BSP team can provide setup, training and implementation services to sync the company’s goals with the capabilities of software.

Tim has practiced public and private accounting for over twenty years in the service and manufacturing industries. He is an advanced-certified QuickBooks Pro Advisor, and a member of the Institute of Management Accountants, the National Advisor Network and The Sleeter Group.


  • You may not always have enough inventory to fulfill a customer’s order. If you use sales orders, you can partially fulfill an order, and QuickBooks tracks the backordered items on both the sales order and the invoice.

  • I have a few questions about the crazy negative inventory supplies. I work with Quick books Solutions: Manufacturing and whole sale 14.0 multi user (total of 5 staff . I am a new staff worker (and never used Quick books before) and I am reading over the manual and trying to piece things together. One thing when we order, fill out (PO’s) we always just classify all PO’s as non inventory part-shipping in. I was reading the manual and I am wondering if I should be breaking it down more: such as if we are ordering from say company A and it directly shipping it to company B should it be categorized at Shipping in: Non-inventory part. Will this mess up the inventory count (in our stock room) when we go to bill them. Question 2: If we are ordering parts from say company A but having it come straight to our own business I believe we should PO: Shipping In: Inventory part. And 3rd question: If we purchase something/rent something(still both PO’s) from Company A and direct ship to us but never sell it..just for our own use should this be Shipping in: non inventory part? I never used a blog before so not sure if I utilized it correct -Regards out of control inventory

  • Hi Tim,
    I’m so glad read your article recently!
    We have two companies, both are under the same owner. Company A has inventory for sale. Company T provides service to customer, some time Company T buy product from Company A when the service need and charge to customer. Don’t keep inventory in Company T, and also don’t make profit on this item, (the profit made between Company A and Company T) the same purchasing price sold to customer.
    Initially we set up this item as inventory, then we realized we don’t need keep inventory. Can we change this item to NON-INVENTORY PART? Company T need send PO to Company A to order this item, then sold to customer as part of service. Will it affect our financial reports? We have been using QB for 3 years, we would like to change them from 2016. Since we are new to QB, there are a lot of error in inventory, like negative number, negative inventory asset account. After I read your article about inventory, I know I have to correct it ASAP. Please advise!
    Thanks in advance!

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