Using QuickBooks Items to Track Profitability
Items are necessary for selling to customers. We can’t create a sales receipt or an invoice without them.
In their most basic form of setup, items contain a description for the sales document, the price, taxable status, and for accounting, an income account to tell QuickBooks where to post the revenue.
Items can also be used in expense transactions. Inventory would be a good example where QuickBooks needs to know each item purchased and sold. In the case of inventory, QuickBooks requires the use of an expense type of account in item setup.
There are other times when both expense and income needs to be tracked by item. In these cases, either a service type or a non-inventory part type item is usually created.
Examples requiring this kind of setup would be any company that tracks activity by job or project. Besides contractors, this could include architectural firms, engineering firms, and the like.
In these cases, the QuickBooks user must instruct the software to track both sides of transactions by item.
For our example, we will use the sample company Rock Castle Construction, a building contractor. Above is a screenshot showing the edit window of a two-sided item. Note the checkbox in the center-left of the window.
“This service is used in assemblies or is performed by a subcontractor or partner.” This explanation can confuse some QuickBooks users, but basically the setting means there will be both a purchase side and an income side to the item setup.
You can see the lines drawn underneath the labels, purchase information and sales information. Then, even lower in the window, the circled areas denoting the appropriate accounts for each type of transaction.
With this setup, QuickBooks will know which account to use depending upon what type of form is selected for a transaction. Checks and bills will cause it to use the expense account, invoices and sales receipts will be posted to the income account.
The reason for this setup is to allow the comparison of income and expense for a certain item. Let’s create an expense and income for a particular job, Kristy Abercrombie’s Kitchen. We’ll create then invoice the customer for the electrical work.
A bill is created using the Items tab (as shown) rather than the Expenses tab. As you can see, the Electrical item shown before has been used to create an expense for this project in the amount of $588.75.
Let’s invoice Kristy $750.00 for the work done by C.U. Electric.
Above is an invoice for the Kristy Abercrombie Kitchen project using the same item, Electrical, that was used in the bill for C.U. Electric.
Now, let’s look at a report that will compare our expense and income for this project.
The highlighted line shows how the Job Profitability Detail report compares the revenue and the cost for one particular item for one particular project or job.
This is only possible with the use of two-sided items. Using the Expenses tab in transactions will prevent this comparison. Fail to use jobs/projects in either expense transactions or invoices and this report will not work.
Used properly, two-sided items, in companies that sell by jobs or projects, can yield valuable information greatly affecting the company’s profitability.