Paying a Bill Before Receiving Inventory in QuickBooks
Buying inventory is simple in QuickBooks. Create a purchase order, receive the items, enter the bill, pay the bill. Simple! Sometimes things don’t occur in this nice sequence, and it isn’t always obvious what the best procedure would be. What if you have to pay the bill before you have received the items? In this article I’ll give you some suggestions as to how to handle this situation.
Update: Intuit has added an “Enhanced Inventory Receiving” option in QuickBooks Enterprise V12 that addresses this specific issue – allowing you to create a separate receipt and bill transaction. See my article on this at http://www.sleeter.com/blog/2011/09/quickbooks-2012-enhanced-inventory-receiving/
Entering Bills Before Receipts
If you are using purchase orders, the normal process is to create the PO, then to enter the bill and receive against the PO. The bill shows up in Accounts Payable, the inventory items are received. However, if you are asked to pay the bill ahead of receiving inventory, this process won’t work. If you follow the normal process you will have the bill available to pay in the vendor center, but your quantity on hand for the item will show that they have been received and are available to sell, which is not the case.
You can enter a bill that is not associated with the PO or receipts of items, but later when you receive the items you are still asked to enter a bill. This must be done so that you can enter the proper cost of the received items. You don’t want to enter ANOTHER bill, and you want to close out that open PO, so what can you do?
The key is to use the expenses tab of the bill initially, and later change this when you receive the items. Let me show you the steps to take. We’ll start with a simple PO for a Cog.
Create a Holding Account
First, in our chart of accounts (COA) I am going to create an other current asset account that I will name Advanced Inventory. You can give this any name that you want, the idea is that this is a temporary holding account for the cost of the items. Talk to your accountant about this account – some people might want to make this a different type of account (an expense account, perhaps).
Entering the Bill
Now we’ll enter a bill for a PO. I’ve selected the PO, and the program shows the items to be received in the items tab.
If we enter the quantity received at this point the items are available in inventory, and that isn’t what we want. We are paying for the items, but we don’t want the quantity on hand to show that we have them.
Start by entering any corrections to the cost value of any item to match the bill. Then look at the items tab and you can see what the total value of the order will be ($1.00 in this case).
Click the Clear Qtys button at the bottom of the window to set all quantities to zero – the items tab will show a value of $0.00.
Select the Expenses tab, select the Advanced Inventory holding account that we created earlier, and enter an amount that is equal to the value that you are going to receive (the value that was showing on the items tab earlier).
Save the bill. You haven’t received the items yet, but you have entered a bill for them. The bill shows in your accounts payable. The cost of these items now show in the Advanced Inventory account. You can look at that account at any time and get the value of all items that you have paid for but have not yet received.
Receiving the Prepaid Items
At a later date you will receive the items. Go to the Vendor Center and locate the existing bill, then double click on it to open the bill. We want to populate the bill with the proper quantities that you received. You want to use the original PO to fill the quantities so that the bill is associated with that original PO. You must delete each detail line that shows in the items tab. Then click the Select PO button in the lower left corner. Select the original purchase order.
Now go to the expenses tab and delete the line (use ctrl-del to delete a selected line). Click on the Save & Close button to save the updated bill.
At this point we have:
- Updated the inventory balances.
- Posted the cost of the received items to inventory assets.
- Retained the bill, which may or may not have been paid already.
- Associated this bill with the PO, properly closing it.
- Removed the cost from the holding account (“Advanced Inventory” in my example).
I hope that is clear – let me know if it isn’t!
About the Author (Author Profile)
Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70′s, focusing on inventory and accounting software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor. Look for Charlie’s articles in the QuickBooks and Beyond blog, as well as his California Wildflower Hikes blog.
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Kathleen,
Thank you very much. We will give it a try.
To be honest, this is extremely time comsuming. It is a good idea for several transaction. However, like my company, we prepay about 300 transaction each month and receiving is handled by receiving department. It is very hard for them to located the existing Bill to perform the second step. I am still looking for the better solution to solve it.
It is a complicated process, because QuickBooks generally treats the receipt and bill as one transaction.
Note, however, that with the release of QuickBooks Enterprise V12 there is an “enhanced inventory receiving” option that lets you separate the bill from the receipt. See my article on this at http://www.sleeter.com/blog/2011/09/quickbooks-2012-enhanced-inventory-receiving/
And that is only available if you move to Enterprise, in the 2012 release. THERE ARE RISKS if you convert an EXISTING file to use this feature – look at the cautions in that article.
I think I found another way of doing it. To avoid all the entries, what I do is make a payment to the vendor via the checkbook (I usuallt wire funds) and choose the Advanced Inventory asset account. When the product is received, I create the bill from the PO. I then make a credit for the Advanced Inventory payment and pay the bill with the credits. This makes it easy for me without having to worry about all the items on the bill. So far, so good. Technically, if you are paying for inventory without receiving it, you are creating a credit anyways with that vendor. We normally pay 30% deposit, then 70% when items are shipped. Tell me what you think…
I have been ordering online and paying ahead of time. Then, when I receive the item, I do a receive without bill. I make the association, but I enter 0 for the amount. It seems to be working, but I’m wondering if I’m messing up the tracking somewhere.
Bryan, depending on details, the problem is going to be that you aren’t entering a cost for the received item. So it will have no value, and your COGS value won’t be accurate when you sell the item.
Thanks a lot for your solution. It solved my problem with quickbooks premier 2011.
Our company is located in UAE and almost all of our inventory is imported from China. Manufacturers send us the bills/invoices before they start the manufacturing process. We typically pay 30% deposit, then 70% when items are ready to be shipped. We want to keep track of the bills and the amount due of each bill.
Your solution can address this situation.
Hi Charlie,
The first thinkg I would like to thank you for sharing the solution for paying before receiving inventory. I have to do this few times every month. I do have a question wondering if you have solution for it.
I did the exactly the the same process like your posting; however, sometimes I received a part of inventory during one shipment, not full inventory came at the same time. For example, the total bill amount is $1000. I received $700 inventory in the first shipment. Now my bill shows ” expense tab: $300. and Items tab: $700.” And then the second shipment coming, so I have to receive the $300 inventory. How can I do that without double the first time inventory.
Thanks,
Joy, then I might consider some other approach than what I list here. I might just enter the bill, manually mark the PO as closed (if using a PO), and do a value/quantity inventory adjustment, to get the correct dates and values for the receipts. Not the simplest workflow.
We have a slightly different problem. We’re what is called a “pass-through” entity. This is because we almost never retain ownership of the items (there’s no “items on hand”, and when there is, there is usually just one of them). Imagine a used car sales organization, but with little inventory. When we buy an item we are usually simultaneously selling it to someone else. We buy and sell mostly second-hand items (occasionally new items as well).
We prefer to use PO’s, and we often receive partial payment for the item which we then pass on to our “vendor” (I’ll take up the reason for the quotes later). It’s a simple deposit which QB’s makes not-so-simple for our purchase-side of the transaction. It seems weird that you can apply a customer’s partial payment to his invoice without closing the invoice, but you can’t do the same with your PO’s. We would like to apply the partial payment to the PO, but we can’t without closing the PO. This solution may work, but it didn’t cover what you do if you’re only putting part of what is owed for the item against the bill. I presume we can just apply the partial against the bill and wait until we receive the balance to close out the transaction as described. (is this confusing? have I described what we do in a coherent way?)
The “Vendor” in quotations is another pet peeve about QB’s. We often have customers who can also be vendors. QB’s cannot handle this. We have to slightly change the name of the company as “customer” (or as vendor) so that QB’s will allow entering in the second listing of the company (it can be as subtle as leaving out a comma or period). The address, phones, contacts, etc. (assuming you even bother to enter that info) can all be the same, but the name cannot.
Donald, I don’t have a simple answer for you, as I’d have to dig in a lot more and get additional information. The simplest things that I can say at this point are:
-You often have to use clearing accounts to do these kinds of manipulations, and Intuit doesn’t make it easy. Tracking this stuff is complicated, sometimes you have to use notes attached to transactions to track what is going on (if Intuit provides notes in the places you want).
-I understand the complaint about Vendor/Customer, and I don’t have any solution. It can be a real pain.
QuickBooks is a very good basic accounting system, but when you get a bit off the mainline, it can be a chore to work with.
P.S. We also run our business on an accrual basis, but we do our taxes on a cost basis. This may affect how this works, I don’t know.
We use QB Pro 2012. We purchase inventory and pay by using credit card. We write a monthly check to our credit card company. So for payment, we usually have expense payments such as meal, travel, etc and then under items tab we pay for inventory. Question is should we be entering a “receive inventory” also? Because if do follow receive inventory (with or without bill), and when we pay our credit card bill, we end up double the inventory on-hand.
Wes, you have an item receipt. When you pay the bill for this receipt, select “credit card” in the pay bills window. That will enter this as a credit card payment and you will see it in the credit card reconciliation window when you reconcile and pay the credit card balance later.
Hi Charlie -
thanks for the great instructions. I just completed them step-by-step. I need to find a way to show the payment on one date and the receipt of items on another date. When I followed your instructions, it showed them to be the same date. Did I do something wrong?
Zak, in normal QuickBooks setups, you have one transaction that covers the bill and the item receipt, and they have one date. You can’t change that normally. You CAN get the Enterprise version, and implement “enhanced inventory receiving”, which gives you separate bills and receipts, but there are other issues with that. See the link at the top of this article to the first of several articles about that feature.
Having an issue with conflicting dates. At the time the charges are being posted to the credit card account that I apply to the Advanced Inventory Asset account. I need to record the correct date that the items are actually being received. I can’t change date that the charge was placed on the credit card cause that will change our records for that. Any ideas on how I can get the charge out of the inventory asset account using the actual date the items are received and not effecting the bill? Thank you
Angela, all you can do is to separate the transactions. Don’t list the items on the credit card account, use the accounts tab instead. Receive the items separately from the credit card transaction.