There’s a lot of confusion surrounding Items in QuickBooks, largely do to the QuickBooks manual’s insistence that you must use Items to track construction costs and to provide job cost reports. This just isn’t correct.
For many years, the easy argument against using Items was that the Item Number was limited to 8 characters, which was insufficient to properly display a cost code description, and that the Item Description, which is longer, cannot be displayed on reports. However, QB 2001 removed that limitation by increasing the Item Number to 25 characters, so now the argument shifts to a more difficult task of illustrating that the Accounts based job reports are superior to the Items based reports, a task that I reserve for my live presentations at seminars. Suffice it to say here that the Accounts-based reports are better formatted that the Items-based reports, but at least the Items-based reports are readable and so you won’t go wrong using them.
All that having been stated, it’s my experience that you are better served by simply posting your job costs directly to your Chart of Accounts as COGS accounts, and in fact you can observe in my Chart of Accounts that all my cost codes are COGS accounts under a main account #4000 Construction Costs. Nevertheless, you will still need to use at least one Item for writing invoices, and I realize that some people will also insist upon using Items for job cost accounting simply because that’s what the QB manual says, so I’ve accommodated them with these Item Lists.
UNDERSTANDING THE ITEMS LIST
Every Item on the Item List is linked to an account on the Chart of Accounts. Without comprehending this relationship, the Item List and it’s utilization in your bookkeeping system will be completely lost to you. Please review the Item List and the Add New Item or the Edit Item dialog box and you can observe how each Item is linked to an account from the Chart of Accounts, and that many of them may be linked to the same account. In other words, QuickBooks allows you to link multiple Items to the same account on the Chart of Accounts.
The Items List is designed to facilitate retail businesses that buy “items” at a wholesale price, mark them up and re-sell them at a retail price. That’s why the manual is so focused on force-fitting this concept to the construction industry with their examples of you billing the customer for “drywall” and “carpenter hours” and so on. The problem here is that the construction business is not a retail business, it’s a manufacturing business, and in the construction business there is no one-to-one relationship between the things you buy and the things you sell.
USING ITEMS in QUICKBOOKS
QuickBooks makes it somewhat difficult to ignore Items altogether because of a peculiarity in the way the program is designed. When you are entering a check, bill or credit card payment, your are presented with the option of selecting the “Expenses” tab, which will post the cost to an account, or the “Items” tab, which will post the cost to an Item. However, when creating an Invoice or a Purchase Order there is no option: You cannot post an Invoice directly to an Income account, and there for you must use an Item, presumably one that is linked to an Income account.
Sound confusing? Okay, I’ve made this easy, because the Income Items on my Items lists have the same number as their corresponding Income accounts. Just enter the Income account number as the Item number, and you’re ready to continue. For example, Item #3000 Construction Revenue is linked to Account #3000 Construction Revenue, so any invoice you write using Item #3000 will apply the amount of the invoice to Income account #3000, and thus it will be reflected on your P&L report as Construction Revenue.
INCOME / REVENUE ITEMS
The Item List doesn’t have anything specifically called an “Income Item”. This is a term I coined to describe Items that are linked to any of the #3000 Income accounts. These are the Items that you use to write invoices, because invoices represent income to your business.
Assuming that you choose to adopt my recommended strategy of posting your construction costs directly to the Chart of Accounts, you will still need to utilize at least one Income Item (usually #3000 Construction Revenue) so you can write invoices.
CONSTRUCTION COST ITEMS
Again, there is nothing on the Item List specifically called a “Cost Code Items”. Like the “Income Items” described above, “Cost Code Items” is just a term I use to describe Items that are linked to COGS accounts. These are the Items you used to code checks, bills, and credit card charges, all of which represent costs that you are paying. (NOTE: This is assuming that you are not going to use accounts to serve this function as I would advocate).
THE STANDARD GENERAL CONTRACTING ITEM LIST
This is the Item List that you can use for General Contracting and FOR ALL OTHER SITUATIONS, including Speculative projects and for Completed Contracts tax reporting. All you need to do is learn to do the journal entry to move the income and costs from the P&L accounts to the respective Balance Sheet accounts when needed for bank and tax reports.
Items on the Standard Item List are numbered to match their corresponding account on the Chart of Accounts They do not have a letter prefix as utilized in the other Item lists.
THE SPEC / INVENTORY ITEM LIST
This is the Item List you would use for speculative projects. These Items post the revenue from the construction loans to account #2200 Construction Loans and the construction costs to #1500 Inventory. This keeps your Balance Sheet continuously updated but requires you to use the Items-based Estimate vs Actual reports for Job Cost Variance analysis.
Of course, upon the sale of the project you will still need to perform a journal entry to move the sales price to Income, the construction costs to COGS, and to “pay off” the construction loan.
Items in the Spec Inventory Item List have an “INV” prefix.
THE WORK IN PROGRESS ITEM LIST
This is the Item List you would use if your tax liability is being calculated on the Completed Contracts basis and you just can’t stand the thought of your Balance Sheet not carrying these balances continuously so you can do your tax return at a moments notice. These Items post the revenue from your projects to account #2500 Contract Liabilities and the construction costs to account #1700 Work in Progress. This keeps your Balance Sheet continuously updated but requires you to use the Items-based Estimate vs Actual reports for Job Cost Variance analysis.
Of course, upon the completion of the project you will still need to perform a journal entry to move the revenue to Income and the construction costs to COGS.
Items in the Work in Progress Item List have an “WIP” prefix.
First, make your life simpler by not using Items and instead simply post all you construction costs directly to the COGS accounts on the Chart of Accounts.
Second, use just the half-dozen or so Income Items you need to write invoices. Remember, the Income Item number is the same as the corresponding Income account number.
Third, don’t use the Spec Inventory or the Work in Progress Items at all and don’t let anybody else talk you into using them under the banner of “Well, we need to carry these figures on the Balance Sheet to suit the tax man and make your banker happy”. Instead, just learn the very simple procedure of generating the report to identify the numbers and then doing a Journal entry to move these numbers when needed.