QuickBooks Online tracks your products and services in the Sales menu alongside All Sales, Invoices, and Customers. If you’re an eCommerce company you sell products and services online. You’ll want to study this QuickBooks Online products and services deep dive to get a better understanding of how this works.
Even if you don’t want to be an accountant, knowing this will help you get better at managing your business. To manage your business better, you will want to understand your basic financial statements; the Balance Sheet and Profit and Loss. Learn how QuickBooks Online products and services work, and you will have a clearer picture of how your transactions should impact these financial statements. Then you’ll know when something doesn’t look right, and you’ll know where to look to find the root of the issue.
Most importantly if you are the eCommerce business owner you will be able to have a more intelligent conversation with your accountant when you know your financial statements don’t look right.
Do your sales on your income statement not look right?
Is the inventory number on your balance sheet not lining up with what you think you have in your warehouse?
This is where you’ll want to go to research why. Then you’ll either confirm that the information is correct, or you’ll find out what’s wrong and fix the issue.
QuickBooks Online products and services are the digital version of what is in your warehouse or on your shelves.
If you sell light bulbs on Amazon, then you need a product for that in QuickBooks Online.
What is a SKU anyway?
You probably sell all different kinds of lightbulbs. For each different kind you need a Stock Keeping Unit number, or a SKU.
You’ll need a name for each product. If you need to distinguish by color or size or any other feature, you may need a separate SKU for each variation.
Here’s how to decide if you need a separate SKU or not. Think in terms of how you want to track the quantity you have in stock. If you would need to know how many you have of an item with one variation of a feature vs another, then it’s a separate SKU. If you don’t care, then use the same SKU. You can always change this later if you find you made a mistake, so don’t get too hung up on it, and always err on the side of keeping it simple.
QuickBooks Online products and services give you the ability to track all of this information, and there are some other important things to consider.
When you purchase inventory you own it. It helps to think of it as though you may never sell that item. That’s why it is not an expense when you buy it. It goes on your balance sheet, and we call it “Inventory.”
When you sell inventory, four accounts are affected:
- Cash or Accounts Receivable
- COGS (Cost of Goods Sold)
How Transactions Flow through QuickBooks Online Products and Services
The inventory you bought moves out of inventory (on the balance sheet) because you no longer own it. You sold it to someone else.
That inventory cost, becomes cost of goods sold (on the income statement), which is ‘like’ an expense, but it is actually called “contra-income.” This means it “goes against” income.
Hopefully we sold that inventory for something more than we paid for it. That “Sales” amount minus the COGS is your gross profit.
If you’re an eCommerce company, then you probably don’t have accounts receivable. The sale is made and cash (ultimately) is received albeit through some credit card processor with a few days delay.
Let’s say that you perform some “service” on the product before you ship it out. Maybe your light bulb goes inside some sort of casing, like the edison light that sits on my desk:
The Services part of QuickBooks Online Products and Services
If you charge for this service (let’s say if it is some real custom work) then that will be a service item. You don’t purchase this item, so there is no inventory or COGS associated with it. If you pay someone outside (non-employee) then the cost of that service will be in your outside services account. If an you or an employee does it, then it is in the Payroll Expense for your company.
A service item is assigned an income and an expense account (if you pay someone outside for it). There is no inventory account to assign.
Now you have all of the pieces to set up QuickBooks Online Products and Services.
When you set up an inventory part, you will need the following at a minimum:
- Sales / Income Account
- Inventory Account
- COGS Account
You will likely also want to include a description, but not necessarily. Especially for eCommerce, your descriptions will be on your website or sales channel.
Your Master SKU List
There has to be a mapping somewhere between the SKU’s.
There can only be one SKU per product. If your sales channels have different SKUs for the same product (and this is common) you will want to maintain a list somewhere that maps the Sales Channel SKU to the SKU in QuickBooks Online.
In QuickBooks Online there absolutely has to be one SKU per product. That’s why I like to call this the “Master SKU.”
You may be thinking that you use an app for your eCommerce business that keeps track of this. I would not rely on that. Apps make mistakes. Keep a list. Use that list to keep your app in check.
Two products that are great for tracking your Master SKU list are:
Now let’s take QuickBooks Online products and services a step further.
When you really understand how QuickBooks Online Products and Services work, you can get creative.
Lets say your customer prepays you? You want to invoice for that prepayment. This means you’ll want an item called something like “Prepayments.” But above we discussed that these items are linked to an income or expense account.
Here’s a secret: You can choose any kind of account to link to, where you normally link to an income account. If you get a prepayment, it is a liability. All you need to do is create your “prepayments” item and link it to the liability account instead of an income account.
Watch the video above to see what this looks like, and then check out Tracking And Managing Inventory In QuickBooks Online.
For more on the prepayments aka Customer Deposits check back for an upcoming post on Customer Deposits in QuickBooks Online.