If you’re managing inventory for your own business or juggling multiple ecommerce accounts, keeping track of purchase orders and stock levels shouldn’t feel like a full-time job. That’s where QuickBooks Online comes in. It helps you manage inventory, track POs, pay bills, invoice clients, and more, all in one place.
Compared to alternatives like FreshBooks and Zoho Books, QuickBooks Online stands out for its stronger integrations, easy-to-use interface, and no-hassle cloud access.
This guide will walk you through how to set up and manage inventory and purchase orders in QuickBooks Online, plus common mistakes to avoid and tips on how to get the most out of them. Let’s dive in.
- How QuickBooks Online handles inventory management
- How does QuickBooks calculate the cost of goods sold?
- Overview of QuickBooks Online’s inventory management features
- How to set up inventory in QuickBooks Online
- How to create and manage purchase orders
- Best practices for accurate cost tracking
- Key inventory reports to run in QuickBooks
- Common QuickBooks inventory mistakes and how to avoid them
How QuickBooks Online handles inventory management
QuickBooks Online makes it easier to track inventory by letting you add individual items with details like product name, SKU, description, cost per item, quantity on hand, and reorder points. As sales come in, inventory levels update automatically in real time, so you always know what’s in stock.
While QuickBooks Online isn’t a full-scale inventory management system, it does a solid job of tracking purchases and sales, generating reports, and alerting you when stock runs low. If you need deeper inventory controls—like batch tracking or advanced forecasting—you might need additional tools, but for many small businesses, QuickBooks’ built-in features are enough to stay organized.
How does QuickBooks calculate the cost of goods sold?
QuickBooks uses the weighted average cost method to calculate COGS. This method takes the total cost of inventory available and divides it by the total number of items in stock to determine an average cost per unit.
Every time an item is sold, QuickBooks applies the weighted average cost to calculate the expense recorded as COGS on the income statement.
The standard formula for COGS is:
COGS = Beginning Inventory + Purchases – Ending Inventory
Let’s break it down with a hypothetical example:
Fresh Cookies, a bakery startup, starts 2024 with $5,000 worth of inventory. Throughout the year, they purchase an additional $10,000 worth of cookies. By the end of 2024, the remaining inventory is $3,000.
Now, applying the formula:
COGS = $5,000 (Beginning Inventory) + $10,000 (Purchases) – $3,000 (Ending Inventory)
COGS = $12,000
This means Fresh Cookies reports $12,000 in COGS on their 2024 income statement, representing the total cost of inventory that was sold during the year.
Pro Tip: Want to calculate and record the COGS of your own business? Check out this useful QuickBooks Online inventory cost calculator.
Overview of QuickBooks Online’s inventory management features
QuickBooks helps businesses keep inventory organized by tracking stock levels, automating updates, and generating reports in real time. Once inventory tracking is enabled in settings, you can add new products with details like SKU, cost, and quantity, set reorder points to get low-stock alerts, and record purchase orders that automatically update stock levels.
Sales transactions instantly adjust inventory counts when items are sold, while built-in reports like “Sales by Item” and “Inventory on Hand” help you analyze product performance. QuickBooks also lets you manually adjust stock for damaged goods, returns, or discrepancies, ensuring your records stay accurate.
How to set up inventory in QuickBooks Online
Here’s how you can set up your inventory.
Activate inventory tracking
- Click on Settings — the gear icon in the upper-right corner.
- Select “Account and Settings” then click on the “Sales” tab in the left-hand menu.
- Click on Edit in the Products and Services section.
- Turn on the Show Product/Service column on sales forms. A helpful tip: create flexible pricing for the inventory items you sell by clicking on “Turn on price rules.”
- Select “Track quantity and price/rate” and turn on “Track inventory quantity on hand.”
- Click on Save and select Done.
- Once you’ve activated your inventory tracking, you’re all set to start adding all of your inventory of items and services into QuickBooks Online.
How to create and manage purchase orders
Now let’s get your inventory out there by following this step-by-step guide on how to create and manage purchase orders (POs).
Step-by-step guide to creating a purchase order (PO)
Step 1: Activate the Purchase Order Feature
Before you create a purchase order, enable the purchase order feature in your QuickBooks Online settings by following these three steps:
- Go to ‘Settings’ and click on ‘Account and Settings.’
- Select the ‘Expenses’ tab and click the edit icon in the ‘Purchase Orders’ section.
- Activate and click on the ‘Use Purchase Orders’ option.
- Finally, select “Save” and you can start creating your company’s purchase orders in QuickBooks.
Step 2: How to create and send purchase orders
Click on ‘+New’ and choose ‘Purchase Order.’
Select your supplier from the dropdown menu, check the mailing address, and enter the items you wish to purchase.
- For all direct shipping items, enter the customer’s name and verify the shipping address.
- You can then save your purchase order for later use or send it directly to your supplier’s email address.
To locate your inventory later, click on ‘Expenses’. To send a purchase order, click ‘Send’. And it’s off!
To enter bulk import purchase orders, we suggest using this integration, SaaSAnt Transactions. This tool seamlessly integrates with your QuickBooks Online account and you can save an enormous amount of time by uploading bulk purchase orders while growing your business.
Step 3: Update the status of your purchase order
After creating a purchase order, it will remain ‘Open.’ Once the supplier confirms the order, you can then link it to an expense or bill to complete the transaction. Your QuickBooks Online account will change the status to ‘Closed.’
Step 4: How to manage purchase orders in QuickBooks Online
It’s important to monitor your open purchase orders to keep your accounts in check. To manage purchase orders in QuickBooks Online:
- Click on ‘Reports.’
- Scroll down and select the ‘Expenses and Vendors’ section and click ‘Open Purchase Order Detail.’
- Click on Reports to see reports based on custom dates, months, or years. To view pending purchase orders, click on ‘Run Reports’ to see the pending purchase orders. After making any changes, click on ‘Save Customization.’
Best practices for accurate cost tracking
Part of managing a successful business is keeping track of costs that are well within the means of your budget.
These three features: job costing, project management, and expense tracking, can efficiently track and manage your business’s costs without you ever having to worry about going over budget.
Job costing
With the job costing feature, you can:
- Keep track of all your job costs during the duration of the project.
- Track costs for each project’s labor, overhead, and materials.
- Create a budget with estimates and plans for upcoming projects.
- Bill throughout the project to maintain cash flow.
Project management
The project management built-in feature in QuickBooks Online allows you to:
- To create and track individual projects, such as income, assigning costs, and time spent on each project.
- Add cost estimates to projects.
- Track expenses, invoices, and hours worked.
- Download instant reports to calculate labor costs and profitability.
Expense tracking
Track business expenses in real-time and all year round on QuickBooks with expense tracking. This feature lets you:
- Assign tax categories to claim deductions.
- Set up recurring transactions for fixed expenses.
- Track sales tax rates.
Be sure to take advantage of the job costing, project management, and expense tracking features on your QuickBooks online to ensure the smooth allocation of your company’s budget.
Key inventory reports to run in QuickBooks
Once your business is generating regular inventory sales, looking at your QuickBooks inventory reports is a great way to gain valuable insight into your stock levels, manage your inventory, prevent stockouts, identify sales trends, and improve profitability by understanding which products are your best-sellers.
When using QuickBooks, the key inventory reports you should generate are the:
- Inventory Valuation Summary: This summary shows the total value of your inventory, like the average cost for each product and quantity on hand.
- Inventory Valuation Detail: This report gives you a breakdown of transactions for every current inventory item, as well as the cost and quantities on hand that have been affected over time.
- Physical Inventory Worksheet: Generate this report to compare your physical count to your QuickBooks data.
Keeping track of your inventory status can keep your business afloat when you generate these three reports regularly.
Common QuickBooks inventory mistakes and how to avoid them
Even though QuickBooks Online is a user-friendly accounting software that helps you track your inventory, purchase orders, and sales, if you don’t keep up with updating the progress of your business, it won’t do the work for you.
Wrong initial quantities and valuation method
By entering the wrong starting quantities of items into your inventory, you can throw off your inventory from the very beginning. If it’s not updated, this could affect your COGS.
How to avoid this common mistake?
- Always ensure accurate data entry of all inventory items. This is essential because when you order inventory in your QuickBooks Online account, your Inventory Asset account increases by the cost of inventory on your balance sheet, and the Quantity of Hand Units also increases.
- Understand your valuation methods. The value of your inventory is the amount you paid for it. For instance, if you purchased a case of 100 buttons at $1.00 each, the value of your inventory is $100.
Not tracking inventory properly
Once your inventory is set up, it needs to be maintained regularly and contain accurate data. Neglecting to update your inventory levels can produce low or understocked items, overstocking, and financial inaccuracies in generated reports.
How to avoid this common mistake?
Review inventory reports. Generate the Inventory Valuation Summary, Inventory Valuation Detail, and Physical Inventory Worksheet daily to monitor stock levels, sales, and daily inventory and update them at the end of the business week.
Wrap-up
QuickBooks makes it easy to track inventory and manage purchase orders, but only if it’s set up correctly and maintained properly. If you’re new to QuickBooks, following this guide will help you get started, but avoiding common mistakes (like incorrect starting quantities or failing to update inventory in real time) is just as important. That said, QuickBooks isn’t a full-scale purchasing or inventory management system. If your purchasing process is getting messy, approvals are slowing things down, or you need more advanced tracking, you might want to look at additional tools, like ProcurementExpress.com, which integrates with QuickBooks, to fill the gaps. Start your free trial of ProcurementExpress today.
