What is the role of opening/closing inventory in COGS?

#1. Opening and Closing Inventory under COGS are used with "periodic" inventory accounting methods, not with "perpetual" inventory. When you use Inventory Items in QuickBooks you are using a perpetual inventory method which is unrelated to Opening and Closing Inventory accounts in COGS. Some businesses use a perpetual method for some inventory, a periodic method for other inventory.

The Inventory Asset account is associated with perpetual inventory in QB and therefore generally is NOT related to Opening and Closing inventory in COGS.

If you are using the QB inventory features for all your inventory, you do NOT use the Opening and Closing Inventory COGS accounts.

If you are using a periodic inventory method you generally need both Opening and Closing Inventory accounts in COGS (not just Opening Inventory), as well as Purchases. If you are a manufacturer it gets more complicated. Opening Inventory in COGS should equal the Inventory Asset at the beginning of the period (i.e., at the end of the previous period). Closing Inventory in COGS should equal the Inventory Asset account at the end of the period - that's why it's called "Closing" Inventory.

#2. There is no such thing as depreciation of inventory.

You are clearly confused and should consult a competent professional accountant at your place of business where he will have some chance of understanding what you are talking about and may be able to provide appropriate advice and explanations.

Even with a perpetual methodology, all businesses should employ a periodic snapshot ("take inventory") with the difference between periodic and perpetual posted to (usually) "shrinkage."

Of course inventory - just like almost every other asset - can depreciate. Ever heard of "Day-old donuts?" Further, I ran into a case at a plant nursery where, when doing their year-end inventory, they had a provision for the inventory to "appreciate." The unsold plant (they reasoned), now a year older, is bigger and therefore more valuable.(?!!) Hey, it works for them.

"HeyBub" wrote

Yes, but that's not the same as the "periodic method", it's just a common-sense validation of the perpetual records. As such, it's part of the perpetual method.

"HeyBub" wrote

depreciate.

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Inventory does not "depreciate" in the correct accounting use of the term. The loss of value of inventory may be called obsolescence, shrinkage, or various other terms but it should not be called depreciation as this is likely to confuse people.

Your nursery may have used the term "appreciate", but what they were (probably) doing is using the generally accepted accounting principle of recording inventory at "lower of COST or net realizable value". The cost of much nursery inventory increases because the company spends more money on it every year in fertilizer, labour, and other things. In this sense nursery inventory is similar to work in process in a manufacturing business, and very UN-like donuts.

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Hello,

So then how could i use the opening inventory COGS account with the closing inventory COGS account ? would i simply put all my inventory value copy it into opening ? and then do the same for closing ? I just get the flows.

Hello,

So then how could i use the opening inventory COGS account with the closing inventory COGS account ? would i simply put all my inventory value copy it into opening ? and then do the same for closing ? I just get the flows.

Let me repeat. It appears that you are using QuickBooks Inventory tracking features (a "perpetual" inventory system). You do NOT use Opening and Closing Inventory COGS accounts with this method. Most people use one single COGS account, often called something imaginative like "Cost of Goods Sold". (It can sometimes be useful to use more than one account, for different types of product for example, but let's try not to make it any more complicated.) Assuming that you set up your Items correctly using the right Item Type and assigning the correct accounts (Inventory Asset, COGS, and Sales) QB will automatically put your purchases into the Inventory Asset account and will automatically transfer the sold products from the Inventory Asset account to COGS. You need do nothing more.

Let me repeat, with emphasis: You are clearly confused and should consult a competent professional accountant at your place of business where he will have some chance of understanding what you are talking about and may be able to provide appropriate advice and explanations. I am not saying this to be snarky or insulting, but to try to be helpful. What I described above works for most users, but there are situations that are more complicated. It is not possible to determine from your question and the information provided whether your situation is more complicated. A competent professional accountant, in discussion at your place of business, can see what you are trying to do and ask appropriate questions to determine what you really need and give appropriate advice to help you set up QB correctly for what you want to do.

What you are likely to get in a newsgroup is information that may be incomplete or inappropriate based on assumptions that don't actually match your situation.

principle

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Very famous tax case involving power tool parts and depreciation. The manufacturer, if I remember the case correctly, made a whole passle of replacement parts for each new version of a power tool. Over the "life" of the tool, they depreciated their spare parts inventory under the theory that the residual inventory had less and less value as the universe of tools into which these spare parts could be placed diminished.

Tax court said no depreciation.

Speaking of oddities regarding depreciation:

I once had an opportunity to invest in a sand pit. As the sand was sold, one could depreciate (actually "deplete") the asset as the mineral was used up. It gets better.

Once the sand was gone, you have a big-ass hole in the ground. You then charge people to dump stuff in the hole (tree stumps, old cars, demolition concrete, etc.). Guess what? As people dump stuff in your hole, you get to depreciate the hole! Yep, you're using up the asset. It gets better.

When the hole fills up, you throw a layer of topsoil on the area and sell the property for a low-cost housing development.

Your basic win-win-win scenario.

Yup, that's what I said. Capital assets may depreciate, inventory does not. However inventory must be valued at "lower of cost or realizable value"; if a business can demonstrate that the realizable value has fallen below cost, that loss of value CAN be written off - but not as "depreciation".

That story's been around so long it has the status of myth. When told for humour, as you did, it omits a whole bunch of relevant facts which include the following:

- The mineral depletion that can be claimed is the actual cost of acquiring the rights to the mineral and/or of discovering and proving the existence and value and recovering the mineral. In other words, you're just writing off money that you actually did spend and did not write off previously.

- Same thing applies to "depleting the hole". And this part is probably appocryphal, pure myth - because in this story no cost has been incurred to create or acquire the hole, unless there were costs involved in preparing it for public access or something similar. Again, you can only "deplete" (write off) costs that have actually been incurred.

- When the property is sold you have a taxable profit. And when you sell the mineral you presumably have taxable profits. And when you charge for use as a landfill you have taxable profits.

By omitting a bunch of facts you can tell this story as humour or "oddity", but under informed and logical analysis it is in fact a reasonably logical and consistent accounting for the use of a property for a variety of purposes over a very extended period of time.

demolition

Correct. My proposed "investment" was $10,000 to acquire part-ownership in the sand/land.

No, the "hole" was to be sold to a separate corporate entity.

Right. These profits are offset (to some degree) by the depreciation.

Gimme your fax number and I'll shoot you the 200-page proposal given to me in 1976 with a cover letter from a tax attorney as to the propriety of the whole scheme.

So you apparently did not make the investment? OK - it's a cute story and you told it well. Thanks for your offer. 1976 was a long time ago. 200 pages is a lot of detail that's been mostly omitted in the interest of storytelling; I don't need all that scrap paper, nor want to tie up my fax, so just bring it along when we meet for a drink.