Adjusting and Correcting Cost of Goods Sold in QuickBooks Made Easy

Correcting the Cost of Goods Sold (COGS) in QuickBooks involves ensuring that all costs related to the production or purchase of goods sold by a business are accurately recorded. COGS is essential for businesses that deal with inventory because it affects gross profit and provides insights into profitability. Here's a detailed guide to understanding and correcting COGS in QuickBooks:

What is Cost of Goods Sold (COGS)?

Cost of Goods Sold (COGS) is the total cost incurred to produce or purchase goods that a company sells during a specific period. For inventory-based businesses, COGS includes:

• Direct materials
• Labor costs
• Overhead costs associated with manufacturing
• Costs related to purchasing and transporting goods

Accurately recording COGS in QuickBooks helps ensure proper financial reporting and aids in making informed business decisions.

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Why is COGS Important?

COGS directly impacts gross profit. Gross profit is calculated by subtracting COGS from total revenue, providing a snapshot of profitability before deducting overhead and other expenses. An incorrect COGS figure can lead to inaccurate profit margins, affecting the assessment of a business’s health.

Common Causes of COGS Errors in QuickBooks

Errors in COGS calculations can arise from various issues, including:

1. Incorrect inventory adjustments – Mistakes in adjusting inventory levels affect COGS calculations.
2. Wrong purchase costs – Incorrect data entry of purchase costs skews COGS accuracy.
3. Inconsistent tracking of inventory items – Items not linked correctly to COGS may result in missed or duplicated expenses.
4. Misallocation of expenses – Assigning non-inventory expenses to COGS by mistake.

Steps to Correct COGS in QuickBooks

Below is a step-by-step process to correct COGS in QuickBooks:

Step 1: Verify Inventory Settings

Ensure that your inventory settings in QuickBooks are correct.

1. Navigate to Gear Icon > Account and Settings.
2. Go to the Sales tab and ensure that Track Inventory Quantity on Hand is enabled.
3. Confirm that inventory items are linked to the correct COGS account.

Step 2: Review Inventory Items

Check each inventory item for accuracy:

1. Go to Sales > Products and Services in QuickBooks.
2. Select the inventory item, then click Edit.
3. Verify that the COGS account and inventory asset account are set correctly.
4. Review the item’s cost, description, and sales price to ensure these fields are accurate.

Step 3: Run a Profit and Loss (P&L) Report

The Profit and Loss report provides an overview of your COGS calculations. Use it to identify any irregularities in your COGS figures.

1. Go to Reports > Profit and Loss.
2. Customize the report to match the reporting period and expand the COGS section to see itemized costs.
3. Analyze the report to spot any unusually high or low figures, which may indicate data entry or calculation errors.

Step 4: Check Inventory Adjustments

Inventory adjustments affect COGS calculations, so it’s essential to ensure these are accurate:

1. Go to + New > Inventory Qty Adjustment.
2. Review recent adjustments to confirm the quantities and amounts recorded.
3. Correct any incorrect adjustments by editing the transaction or creating a new adjustment to offset any errors.

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Step 5: Review Purchase Transactions

Ensure that all purchase transactions for inventory items are linked correctly to the COGS account.

1. Go to Expenses > Vendors.
2. Open each purchase transaction for inventory items.
3. Verify that the account is set to COGS for purchases of inventory items.
4. If a purchase is incorrectly categorized, edit it and change the account to COGS.

Step 6: Verify Sales Transactions

Ensure that each sale transaction is correctly linked to an inventory item. QuickBooks uses the item data to adjust inventory levels and calculate COGS.

1. Go to Sales > All Sales.
2. Open each sales transaction.
3. Verify that each item sold is linked to an inventory item.
4. If necessary, edit the transaction to correct any errors.

Step 7: Correct Journal Entries for COGS Adjustments

If there have been incorrect journal entries affecting COGS, they will need correction.

1. Go to + New > Journal Entry.
2. Adjust the journal entries that mistakenly affect the COGS account.
3. Save and close the changes.

Step 8: Reconcile Inventory and COGS Accounts

Regular reconciliation helps in catching any errors before they become significant issues:

1. Go to Accounting > Chart of Accounts.
2. Locate your Inventory Asset and COGS accounts.
3. Reconcile these accounts against bank and vendor statements to identify any discrepancies.
4. Resolve any discrepancies by adjusting transactions as necessary.

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Troubleshooting Common COGS Issues

Incorrect COGS Balance on the Profit and Loss Report

If your COGS balance appears too high or low on the P&L report, it may be due to:

1. Incorrect expense categorization – Ensure all inventory purchases are recorded in COGS.
2. Inventory adjustments not reflecting correctly – Verify all adjustments for accuracy.

Sales Transactions Not Reducing Inventory

If sales transactions don’t reduce inventory correctly:

1. Check product/service items – Ensure each product item is set up as an inventory item.
2. Verify sales transactions – Ensure that the items sold are linked to inventory.

COGS Not Calculated Properly Due to Inventory Shrinkage

If there’s inventory shrinkage (e.g., lost, damaged items), record an inventory adjustment:

1. Go to + New > Inventory Qty Adjustment.
2. Select the item and enter the quantity adjustment.
3. Choose Shrinkage or a similar reason for the adjustment.

Tips for Managing and Correcting COGS in QuickBooks

1. Use Regular Inventory Counts – Conduct inventory counts to ensure quantities on hand match records.
2. Implement a Cutoff – Use monthly or quarterly cutoffs to avoid rolling errors in COGS.
3. Leverage QuickBooks Automation – Utilize QuickBooks’ automated inventory tracking features to minimize human error.
4. Analyze Historical COGS Trends – Regularly reviewing COGS trends helps spot unusual variances.

Best Practices for Preventing Future COGS Errors

1. Standardize Purchase Processes: Ensure that all inventory purchases are categorized under the COGS account.
2. Regularly Update Item Costs: Make sure to update the item cost whenever there is a change in the purchase cost.
3. Verify Vendor Bills: Double-check vendor bills and ensure that only inventory-related purchases are charged to COGS.
4. Implement Approval Workflows: If multiple people are managing inventory, set up approval workflows for inventory adjustments.

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Conclusion

Correcting and managing COGS in QuickBooks is essential for accurate financial reporting and a true reflection of profitability. By following best practices and regularly verifying inventory and purchase data, you can minimize errors in COGS and maintain an accurate financial picture of your business.