When you are in the business of selling products it is important to understand how those transactions flow in QuickBooks or any accounting software.
When you purchase inventory you now own something – an asset. This is not an expense. In fact because without the right marketing and customer base, you might never sell it, it is not an expense.
When you sell the inventory you have 4 things that happen:
A sale = Income
Inventory moves = reduction in inventory
Cost of Goods Sold Incurred = that reduction in inventory is offset in effect by recognizing it’s cost (which is equal in amount to the reduction in value of inventory)
Either a payment or a receivable = either I get money or someone owes me money for the sale.
The difference of course between what I sold it for and my Cost of Goods Sold (COGS) is the profit on that product sale.
In this web cast we go over how this works using QuickBooks – the accounting & bookkeeping concept is the same regardless of whether you use QuickBooks or something else.