Estimated read time: 5 1/2 minutes
In this post, we’ll discuss how to create a cost of goods sold journal entry in QuickBooks Online. This is a simple, effective way to stay on top of your numbers and maintain predictable, sustainable profit margins throughout each quarter. It’s also really important
The good news here is that this is much easier than you might expect. We’ll also explore an optional method that can automate most of this process for you! Read on to level up your ecommerce accounting.
A Brief Background to Cost of Goods Sold (COGS)
Before we dive into that Cost of Goods Sold journal entry, it’s worth briefly touching on the nature of COGS to make sure you’re on the right page. Let’s explore the way inventory moves through a business financially.
Good bookkeeping practice dictates that goods shouldn’t be expensed upon purchase. This is a common mistake that can skew your profit and loss statement wildly up or down in a given month.
Instead, your goods should be recorded as assets on your balance sheet, and expensed incrementally as and when each unit is sold.
This is where the term ‘cost of goods sold’ comes from.
Expensing your inventory this way helps keep your profit and loss statement far more consistent and easy to use. Instead of seeing wild losses in the month that you buy new inventory and inflated gains during the following months, you’ll see a balanced statement that can be used to sustainably predict each coming quarter.
For more information, read Cash vs. Accrual Accounting for Inventory.
How to Create a Cost of Goods Sold Journal Entry in QuickBooks Online
There are actually three main ways to achieve this goal:
- The ‘Bucket to Bucket’ method (this blog post’s chosen method)
- Tracking item by item
- Using an inventory tool
In this blog post, we’ll be discussing the ‘Bucket to Bucket’ method.
The ‘Bucket to Bucket’ Method of Tracking COGS in QuickBooks Online
This process of adding a COGS journal entry looks like:
- Calculate your Cost of Goods Sold number
- Use this number to make a journal entry in QuickBooks Online that moves this lump sum from your balance sheet to your profit and loss sheet.
Confused? Don’t be; it’s actually really simple. This method just needs two data points to work effectively:
- Your inventory figures
- Your COGS number
We’ve created a template to help you track and manage your inventory and COGS. By the way, we also made video showing you how to use it.
Use these numbers in the method.
Pros for the ‘Bucket to Bucket’ method
- It keeps your QBO file nice and clean, without unnecessary entries or distractions.
- It makes it much easier to validate your data. You’ll be using a spreadsheet and will be able to quickly understand what you’re actually looking at.
Cons for this method
- It requires some experience with spreadsheets. Don’t worry, though; it’s fairly straightforward.
- The quantities of your inventory won’t be tracked automatically.
If you’re wanting to bypass the spreadsheets and go straight to an inventory tool, make sure you read this first. We give several things to look for when choosing an inventory management tool.
The Steps for Recording COGS in a QuickBooks Online Journal Entry
Follow these basic steps to make your journal entry.
Step 1 – Create Your Product Costs Catalog
We go into some detail on how to create a product costs catalog in this article.
Check out this oversimplified example of a product catalog below:
|Item||Cost||Quantity Sold||Total COGS|
You’ll want to use your spreadsheet software of choice to create a catalog like the one above for your own inventory. Take the data from whichever channels you’re selling on to input information about how many units you’ve sold over a given time period and how much each unit costs you.
For more information on costing methods for your inventory, read 3 Inventory Costing Methods.
Step Two – Multiply the Cost by SKU X Quantity Sold
To find the right COGS figure for each of your products, you’ll need to multiply the number of units sold by the cost of each unit. With just a tiny bit of Excel-fu, this can be set up to calculate automatically.
Follow these steps:
- Type an ‘=’ equals sign in your Total COGS column
- Type an ‘*’ asterisk symbol
- Click the correct Quantity Sold cell for the given product
- Hit Enter.
This will tell Excel, ‘Hey, multiply the figure in this cell by the value of the figure in this other cell.’
Next, you can tell Excel to automatically sum up a total for your COGS column. Follow these steps to do this:
- Type an ‘=’ equals sign in the cell directly underneath your COGS column
- Type SUM
- Click and drag to select all of your COGS cells
- Hit Enter.
Excel will now automatically calculate your COGS total!
Step Three – Add a Cost of Goods Journal Entry in QuickBooks Online
To add a new journal in QuickBooks, click New and then Journal Entry. You’ll now be using the data you’ve just collected to create your COGS entry.
Take your total COGS amount and:
- Add it as a credit in your Inventory assets
- Add it as a debit in your Cost of Goods Sold account
That’s it! You’ve successfully updated your profit and loss statement in a way that makes predictions much more sustainable.
A quick note on the method described above – you’ll also want to do semi-regular – let’s say quarterly – inventory checks and manually adjust any inconsistencies you may find.
A2X – The Optional Extra
Remember when we said you could automate this process? We rave about A2X in several of our videos; it makes a whole lot of accounting processes much simpler.
It’s possible to sync your A2X account with your various ecommerce channels. This means A2X will pull in data about your SKUs that are currently being sold. You’ll see figures for the number of units you have in stock and how many have been sold in a given time period. By the way, we have a service where we set A2X up for you and sync it both to your sales channels and QBO, making sure that your chart of accounts is mapped out properly, too.
All you have to do is enter the cost for each SKU manually and then click the Review button. This shows you all the relevant COGS data you’ll need. The blue Resend to QuickBooks button will push this information over to your account.
This lets you skip the spreadsheet-making portion of the method we described above. The only manual part of this process is entering your SKU costs!
Some Useful Resources
You may find the following links helpful here:
- Another of our COGS blog posts on good inventory management
- Our YouTube channel
- We have a service where we set up A2X and QBO for you, and teach you how to use it.
We hope you’ve found the tips on this page useful. If you’re interested in having us do your accounting with COGS and inventory for you, let us know.