Simplified Cost of Goods Sold

The Classic Cost-of-Goods-Sold Method
Previously I have insisted that QuickBooks users handle purchases "by the book" with two basic steps:

  1. Enter all purchases invoices into the accounts payable module, even those invoices that will be paid the same day or the next day, then
  2. pay the invoices using the "pay bills" feature.
There is a special reason for treating purchases this way. Under "accounting method" we usually check the box that says "hybrid" and add the explanation "sales reported by the cash method, cost-of-goods-sold by the accrual method, and expenses by the cash method." The short explanation is that it all has to do with this problem:
  1. We want to align sales with inventory sold.
  2. To do that, we have to count purchases even if the purchases are not paid for until several days later.
  3. Using the accounts payable and pay bills modules does that for us.

The Simplified Cost-of-Goods-Sold Method
Where the demand for time is greater than usual, there is a legitimate short-cut. Follow these three simple rules:
  1. During the month when an invoice will be paid within the same month, simply write the check and post the check to purchases.
  2. At the very end of the month, if there are any unpaid invoices on the last day of the month, enter these few and special invoices into the accounts payable module.
  3. At the very beginning of the month, take care to pay the invoices entered into accounts payable through the bill pay module.

  1. On March 3 you receive a Coca-Cola invoice #45724 for $1,678.43.
  2. On March 3 you write a check for $1,678.43. CR the checking account, DR purchases $1,678.43.
  3. On March 17 you receive a Coca-Cola invoice #45906 for $2,743.12.
  4. On March 21 you write a check for $2,743.12. CR checking, DR purchases $2,743.12.
  5. On March 30 you receive a Coca-Cola invoice #45997 for $1,788.90.
  6. On April 1 you have not yet paid that invoice.
  7. You must enter Coca-Cola invoice #45997 for $1,788.90 into the accounts payable module and date it March 30 so that the purchase will be shown for March.
  8. On May 2 you write a check for $1,788.90 to pay the April 30 invoice.
  9. This time you must use bill pay to pay the invoice as an account payable.
  10. On May 2 you also recieve a Coca-Cola invoice for $783.55.
  11. On May 2 you write a check for $783.55.
  12. Since the invoice is received and paid within the same month, CR checking and DR purchases $783.55.

In this example, note the following:
  1. All of the invoices are from the same supplier, but the one that is unpaid at the end of the month is treated differently.
  2. As soon as the one special invoice is paid, go back to the short method for invoices the rest of that month up to the last one or two that are not paid until the following month.

This simplified cost-of-goods-sold method is most appropriate for:
  1. A single-station owner where your hands-on participation will safeguard against paying the same invoice twice and catch other billing errors.
  2. A multiple-station owner where time is of the essence, where labor is in short supply, in other words, in the post-Katrina environment. However, you should have safeguards in place to recheck the checks against invoices. That can be done months later as long as it is in fact done.