How does QuickBooks handles Inventory



QuickBooks tracks the quantity and value of items that have a type of Inventory and Assembly.  It uses an inventory sub-ledger to track individual items then updates the various general ledger accounts as required.  The following accounts are used by QuickBooks to track inventory.


Sample Name/Type of Account

What's its used for

Inventory Asset /

Other Current Asset

This account is used to track the values of inventory on hand.  QuickBooks will create this account the first time an "Inventory Part" item is entered.  This account should be used exclusively for Items.  Do not post any other transactions to this account, otherwise report totals (e.g. Balance Sheet) will not reconcile with the Inventory Valuation report.  


To get more detailed reports, set up one top level account to keep track of Inventory, then set up sub-accounts of the top-level account (e.g. Inventory Asset: Finished Goods).

Sales / Income

This account is used to record the sales side of invoices. When an item is sold its sales price multiplied by the quantity sold is posted to this account.  NOTE: For items that are not sold (e.g. components), this account will never be used, although it is required by QuickBooks.

Cost of Goods Sold / Cost of Goods Sold

This account is used to record the cost side of invoices. When an item is sold, its average cost is multiplied by the quantity sold and then posted to this account. NOTE: for items that are not sold (e.g. components), this account will never be used, although it is required by QuickBooks.



The sub-ledger report is called 'Inventory Valuation Summary':


The blue circled value is the total cost of inventory for all products.  This value should exactly match the asset (s) account described above on the balance sheet for the same period.



They will not match for 1 of 2 reasons:

  1. There is an inactive item with a value.

  2. You made a journal entry directly to the inventory asset account.   

If you double click the item on the inventory valuation summary you will get the detailed transactions on how the value and quantity were derived.



Not the different transactions that make up the balance as follows:

  1. Bill - represents purchases from your vendors and will increase quantity.

  2. Credit - represent returns to your vendors and will decrease quantity.

  3. Invoice - represent sales to your customers and will decrease quantity.

  4. Credit Memo - represents returns from your customers and will increase quantity.

  5. Inventory Adjustment - will increase quantity or decrease quantity.



QuickBooks uses the Average Cost to value Inventory.  The costs of sales is determined by average cost of the items determined at the time of sale.  The average cost is the purchases divided by the quantity.  When an item is sold, the average cost is deducted from the inventory asset.  

See our article on inventory valuation for a discussion on the different methods used.




You must be in single user mode to adjust inventory and do as follows:


  1. Vendors - Inventory Activities - Adjust Quantity/Value on Hand.

  2. Select an account (e.g. Inventory Adjustment).

  3. For the items in question, under 'New Qty' enter the desired new quantity.

  4. If you want to also change the average cost, on the bottom of the adjustment form click 'adjust value'.    Enter the TOTAL value in New Value (e.g. quantity X cost).

  5. Press Save & Close.