Inventory Tracking in QuickBooks: A Guide for Small Businesses
Effective inventory management is crucial for small businesses to maintain profitability, optimize cash flow, and ensure accurate financial reporting. QuickBooks Online (QBO) offers powerful inventory tracking features that help businesses keep tabs on stock levels, costs, and sales.
In this blog post, we’ll cover:
QuickBooks Online’s inventory tracking capabilities
How to set up and add inventory items
Choosing a specific date to audit inventory
Tracking the cost of inventory
The effect of inventory on the balance sheet and profit & loss (P&L) report
By the end of this guide, you’ll know how to efficiently manage inventory in QuickBooks Online to improve financial accuracy and streamline operations.
1. Should I Use QuickBooks to Track Inventory?
Let’s start with this: QuickBooks Online is NOT the best inventory management software on the market. That’s because QuickBooks is fundamentally an accounting software. Inventory management is a great bonus, but it is not the focus of the program. Depending on your business needs, it may be worth investing in specialized inventory management software.
With that said, QuickBooks can be a great solution for managing inventory. Firstly that is because any inventory changes will automatically reflect in your books. Even if you have a specialized inventory management software, you will still need to import data into QuickBooks Online to see the effect on your books. Secondly, your business is going to need QuickBooks anyways in order to track your financial information. So if you track inventory in QuickBooks, then you don’t need to pay for additional software. That’s two birds with one stone.
So even if QBO is not the most powerful inventory management tool, it can still be a viable solution for small businesses.
2. What Can I Do With Inventory in QuickBooks?
QuickBooks Online provides some essential inventory management tools for small businesses. Here’s what you can do in QBO:
Key Features of QuickBooks Online Inventory Tracking
✔ Track Stock Quantities – Monitor how much inventory you have on hand.
✔ Set Reorder Points – Get alerts when stock runs low.
✔ Record Purchase Orders – Track incoming inventory from suppliers.
✔ Adjust Inventory Levels – Correct discrepancies with inventory adjustments.
✔ Run Inventory Reports – View stock value, sales trends, and COGS.
How to Enable Inventory Tracking in QuickBooks Online
Before adding items, ensure inventory tracking is turned on:
Go to ⚙ Settings (Gear icon) → Account and Settings.
Select the Advanced tab.
Under Inventory, toggle on Inventory tracking.
Click Save and exit.
Now, you’re ready to add inventory items.
3. How to Add Inventory Items in QuickBooks Online
Adding products to your inventory ensures accurate sales tracking and cost management.
Step-by-Step: Adding a New Inventory Item
Go to the Products and Services List
Navigate to Sales → Products and Services.
Click New.
Select "Inventory Item"
Choose Inventory (not "Non-inventory" or "Service").
Enter Item Details
Name (e.g., "Blue T-Shirt – Medium")
SKU (optional, but helpful for tracking)
Description (for sales receipts/invoices)
Category (e.g., "Apparel")
Set Pricing & Cost
Sales price/rate (what customers pay)
Cost (what you pay suppliers—critical for COGS)
Taxable (check if applicable)
Set Inventory Details
Initial quantity on hand (if adding existing stock)
Reorder point (e.g., get an alert at 10 units)
Save the Item
Click Save and Close.
Once added, QuickBooks will automatically track stock levels as you purchase and sell items.
Pro Tip: Regularly update costs if supplier prices change.
4. How to Audit Inventory
Your software might tell you what inventory is in your warehouse, but how do you know it’s right? Regular inventory audits help catch discrepancies. I recommend conducting monthly inventory audits if possible.
Why Conduct an Inventory Audit?
Prevent stockouts or overstocking
Identify theft or loss (shrinkage)
Ensure accurate tax and financial reporting
How to Perform an Inventory Audit
Pick an Audit Date – Choose a slow business day (e.g., month-end). Note that whatever day you pick, it is essential that all inventory be counted that day, or it could disrupt operations. Once the inventory audit begins, no items should be added or removed until the audit is complete.
Physically Count Inventory – Record all items in stock. Also remember to check the condition of the product. For example, if working with food products, use this as an opportunity to remove inventory that is expired, contaminated, etc. If the condition of the product is unacceptable, then do not record it in your inventory count.
Compare in QuickBooks –
Go to Reports → Inventory Valuation Detail.
Compare physical counts with QuickBooks records.
Make Adjustments (if needed) –
Navigate to Products and Inventory → Inventory Adjustment.
Enter the correct quantities and reasons for changes (e.g., "Damaged goods").
Recommended Frequency: Monthly for high-volume businesses, quarterly for others.
5. The Effect of Inventory on Financial Statements
Inventory directly impacts two key financial reports:
Balance Sheet Impact:
Inventory is considered an asset. That means that having more inventory raises the value of your business.
Example: You purchase $5,000 in inventory in cash:
Assets (Inventory) Increases by $5,000
Assets (Cash) Decreases by $5,000 (if bought on credit)
No immediate effect on P&L (expense recognized only when sold).
Balance Sheet remains unchanged
Profit & Loss (P&L) Impact:
When inventory is sold:
Asset (inventory) is decreased
Expense for inventory is recorded
Asset (either cash or accounts receivable) increases. Profit is recorded.
Example: You sell $3,000 worth of inventory that cost $2,000.
Revenue: +$3,000
COGS: -$2,000
Gross Profit: $1,000
Best Practices for Inventory Management in QuickBooks
Update Inventory Regularly – Adjust quantities and costs as needed.
Use Reorder Points – Set alerts for low stock to avoid shortages.
Run Inventory Reports –
Inventory Valuation Summary (total value of stock).
Inventory Stock Status (quantities on hand).
Integrate with POS Systems – Sync QuickBooks with Shopify, Square, or other sales platforms if you are using them as your primary inventory tracking system.
Final Thoughts
Proper inventory tracking in QuickBooks ensures accurate financial reporting, better cash flow management, and improved profitability. By conducting regular audits and tracking costs correctly small businesses can make informed decisions that positively impact their bottom line.
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