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.
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!
Karen | Jun 26, 2009 | Reply
Super tip. This is a very rare situation that I have handled with differing solutions depending on the individual circumstances each time. This method will work for everyone, every time. I love consistency.
Thanks,
Karen
ALLIE | Sep 28, 2009 | Reply
We use Fishbowl (hate it) .. and this is one of the biggest issues I have, we frequently pay for items in advance ( usually for items being manufactured in China) I usually wire the payment in full, the goods are manufactured, sent ocean freight.. etc.. at any rate it can be at least 6 weeks before we actually receive the goods. and when we do FB then exports a bill for this.. I find myself having to delete payments, and reissue to post too the correct bill for the items received.. its a hassle!!
Laura Dion | Oct 23, 2009 | Reply
If you make payment for inventory before receiving the goods, this is what I would suggest:
Post the pre-payment check to accounts payable or a current asset account called PrePaid Expenses.
Then, when you receive the goods and enter the bill, post the bill (from the po, if applicable).
Then, apply the credit (from the check, if it hit a/p), or enter a line on the expense tab to minus the prepaid expenses account, giving you a zero bill, if paid in full, or a remaining balance, if not.
Laura D
Bill Gross | Nov 13, 2009 | Reply
With all do respect to the poster of this solution – This is something Intuit should automate and simplify.
The proposed solution is works… but lets face it – its a hack.
Charlie | Nov 13, 2009 | Reply
Bill – true – and you can send feedback to Intuit to ask them to improve the feature. In the meantime, all we can do is to think of ways to make it work (such as I suggest here), or you can find another software solution. I don’t have any control over what they do (and if I did, there are a LOT of things that I would change…)
Muhammad Tasneem | Nov 17, 2009 | Reply
Does any body explain me the Laura Dion method?
Thanks
Debbie | Nov 18, 2009 | Reply
We do not track inventory. The item list is set for non-inventory items & service items and the posting sales accounts are income items. I have no purchase accounts set up on the item list. However when I record a bill into Accounts Payable, I enter it to a Cost of Goods account on the Expense tab. Will this create a problem.
Charlie | Nov 18, 2009 | Reply
Debbie, that is fine, as long as that is the account that you want the expense to be posted to…
Mark | Dec 7, 2009 | Reply
Charlie , is this appropriate if you’re using the accrual method for accounting?
I’m trying to reconcile the fiscal year end and the only difference between the bank account and my books is a payment I had to make prior to receiving the inventory (paid in September but received inventory in October).
Cheers!
Charlie | Dec 7, 2009 | Reply
Mark, the whole reason for doing all of these manipulations is to make it valid for accrual accounting. You post the bill to Accounts Payable vs a holding account, which could be an offsetting asset. You later move the value from that holding account into inventory assets.
The bank account only comes into play when you PAY the bill for the items, not when you post it to accounts payable. So if your bank account won’t balance, you have to look at it to see if you paid the bill at the correct time, or if you are using that bank account in a transaction improperly somewhere.
Anne | Feb 1, 2010 | Reply
Question – with this solution, doesn’t the inventory become on-hand on the bill date? For example, if you pay for the items in June but don’t receive them until August, doesn’t the bill date of June put the items into inventory as of June? I guess you could change the bill date to reflect the day you are receiving the inventory but then you lose the original bill date.
Charlie | Feb 2, 2010 | Reply
Anne, the solution I outlined is better suited to situations where you have a relatively short period of time between the bill and the receipt. If you are talking about multiple months between them it might not be the best solution. Unfortunately, the alternatives tend to be more complicated.