QuickBooks Journal Entries
The information below summarizes the journal entries created in QuickBooks when exporting purchase order receipts, vendor bills, customer invoices, inventory items and during the Update Inventory reconciliation process.
Exporting PO Receipts
The purchase order receipt transaction entered in Catalyst can be exported to QuickBooks to update Accounts Payable prior to the receipt of the vendor invoice. When exported, the purchase order receipt is created as an item receipt in QuickBooks. The journal entry credits Accounts Payable and debits the Inventory account for the item.
Exporting Vendor Bills
A vendor bill is created in QuickBooks with the export of a vendor invoice from Catalyst. When a vendor bill is created in QuickBooks, Accounts Payable is credited and the inventory account for the item is debited. If an item receipt has been applied to the invoice, it is replaced by the vendor bill. The QuickBooks vendor bill 'Date' is based on the date the vendor invoice was entered into Catalyst. The QuickBooks 'Bill Due' date is based on the invoice due date entered in Catalyst. When selecting the Pay Bills menu option in QuickBooks, the 'Date Due' refers to the 'Bill Due' date on the vendor bill.
Exporting Customer Invoices
When a customer invoice is created in QuickBooks, two journal entries are created, 1) a credit to the income/revenue account for the item and debit to Accounts Receivable and 2) a credit to the inventory account for the item and debit to Cost of Goods Sold (COGS). The COGS entry occurs as long as there is an average cost for the item. The debit to COGS represents the fully absorbed cost of the parent item because the average cost of a parent item in Catalyst includes the material, labor, and overhead costs of all levels in the bill-of-material.
In addition, an inventory adjustment transaction will be processed in QuickBooks so that the ending inventory in QuickBooks matches the current on-hand in Catalyst. For example, if item ABC has a quantity on-hand of 100 units in Catalyst after shipment of 20 units and the invoice for the 20 units is then exported to QuickBooks, the QuickBooks on-hand is reduced by 20 units from the invoice creation (credit inventory, debit COGS) and the QuickBooks inventory is adjusted to match the Catalyst on-hand of 100 units. The adjustment is posted to the inventory adjustment account assigned to the product class for the item in Catalyst.
There are no journal entries posted in QuickBooks when a new item is exported from Catalyst. The on-hand quantity is adjusted to match Catalyst, but the average cost for the item and thus total value of inventory for the item is set to zero to prevent QuickBooks from automatically posting a credit to the Opening Balance Equity account when it debits inventory. After exporting items to QuickBooks, the inventory value in QuickBooks can be updated using the Update Inventory function as described in the next section.
For existing items, Catalyst adjusts the inventory quantity and value in QuickBooks to match Catalyst and posts the difference in value to the inventory adjustment account assigned to the product class for the item in Catalyst. The adjustment account is typically an expense or cost of goods sold account, but could also be an inventory account to reflect inventory changes. Whatever the account type, it is strongly recommended that the account number assigned as the inventory adjustment account in Catalyst be different from all others to facilitate reconciliation. It’s acceptable to have different account numbers for different inventory classifications in Catalyst (e.g. finished goods, raw materials, etc.) as long as each of those account numbers are only used for posting inventory adjustments from Catalyst.
An inventory adjustment typically consists of both a quantity and value adjustment in QuickBooks to adjust both the quantity on-hand and the average cost for an item. To perform only quantity adjustments without updating the current average cost stored in QuickBooks, select the ‘Update quantity only’ option on the QuickBooks page of the Company Master. This option updates the quantity on-hand, but preserves the current average cost maintained in QuickBooks. If the inventory quantities and/or average values in Catalyst are not well maintained, an effort should be undertaken to improve the accuracy prior to updating QuickBooks with that data. Improving the integrity of the data in Catalyst will help preserve the integrity of your QuickBooks data.
Catalyst is considered the inventory system of record between the two systems since it is where all inventory transactions are posted. When the inventory update is run to reconcile the balances between Catalyst and QuickBooks, it could be only a matter of seconds before another inventory transaction is posted in Catalyst and the two systems no longer match. That is one of the reasons the frequent use of the inventory update feature is discouraged. The Catalyst inventory reports should be used to view system inventory and valuations, not QuickBooks. In addition, the quantity adjustments posted to the inventory adjustment accounts may consist of a number of different inventory transaction types, including but not limited to shop order receipts, shipments, cycle count adjustments, scrap adjustments, and material issues. Each inventory update from Catalyst could reflect any or all of those transaction types which makes it difficult to categorize once combined into a single QuickBooks adjustment entry.
The only time the inventory between the two systems needs to be reconciled is at period end close. The period end close can be accomplished a number of different ways so review the following options below to determine the nest option for your company.
Option 1: Run the inventory update to synchronize inventory between the two systems and then review the inventory adjustment accounts to reassign balances as needed. This option may be feasible in situations where it would be safe to categorize all inventory differences as a specific type, especially if different adjustment accounts are used for different inventory classifications. For example, in a light assembly operation, if inventory shrinkage and scrap is low and raw material consumption primarily consists of use in final assembly, the adjustments captured under the raw material inventory adjustment account will primarily reflect material issues which could be classified as COGS or work-in-progress of unsold assemblies. Running the inventory update synchronizes all item on-hand quantities and updates the inventory balances for all inventory accounts, but it could be difficult and time-consuming to properly categorize the transactions in the inventory adjustment accounts.
Option 2: Run the inventory valuation and activity reports in Catalyst and post manual journal entries in QuickBooks to reflect ending inventory balances by class and post cost of goods and expenses based on activity. This method involves running the Inventory Activity by Class Report in Catalyst and posting journal entries to classify the different transaction types into the proper account for each inventory transaction type. However, since the inventory update has not been run, the inventory balances at the item and account level are incorrect. A journal entry would be required in QuickBooks to correct the inventory balance for each inventory class based on the Inventory Valuation Report in Catalyst at period end (using the equation Ending Inventory = Beginning Inventory + purchase order/shop receipts – material issues, adjustments, and shipments). The on-hand quantity for each item in QuickBooks would not match Catalyst, but the balance sheet and income statements would be correct.
Option 3: A hybrid of the first two options - run the inventory update to synchronize inventory between the two systems, clear the Catalyst adjustment accounts and then post cost of goods and expenses based on the Catalyst inventory activity report for the period. The final method updates all item on-hand quantities as well as assigns inventory activity to the proper account for each inventory transaction type. This is accomplished by running the inventory update feature, clearing the balances in the Catalyst inventory adjustment accounts, and running the Inventory Activity by Class Report in Catalyst. The QuickBooks inventory account balances can be compared to the inventory account balances in Catalyst to make any necessary adjustments.
A backup of your QuickBooks company data is recommended prior to running the inventory update feature. As always, please consult your accounting advisor to determine the most appropriate accounting practices for your company.