Q: I see an “account type” in my QuickBooks® Chart of Accounts called “Cost of Goods Sold”. I’m a contractor, not a retail store, so I don’t really sell any “goods”. I shouldn’t need to use that type of account, right?
A: Actually the cost of goods sold (COGS) feature is one of the “hidden secrets” in QuickBooks!
Why? Well, your chart of accounts is the “driver” that creates your reports. I.e., your financial results will appear in the same order (and with the same account groupings) as the structure that you establish in your chart of accounts.
For example, in a profit and loss statement, QuickBooks will display accounts and compute results based on account type ( bolded below) like this:
Because it is especially helpful for company owners (and others) to be able see the relationship between what they earn and the direct cost of producing that income, I encourage my clients to create COGS)accounts for production cost accounts such as:
- Direct labor compensation and burden (the variety of costs required to employ direct labor employees such as payroll taxes, paid time off, insurances, vehicles, bonuses, uniforms, etc.).
- Contracted labor
- Other job costs
- Production costs that can’t easily be assigned to jobs such as construction equipment depreciation or liability insurance.
As shown above, when you use the COGS account type for these kinds of costs, QuickBooks will automatically compute your gross profit results by amount and percent for you!
Why is gross profit information important?
- It tells you what you are making as a result of your daily construction activities (i.e., what is available to cover all of your other company operating costs/overhead and create a profit!)
- It allows you to easily compare your results in a percentage format from year-to-year.
- It’s an excellent way to compare your results to other companies or to industry standards.
Then you can use your expense accounts for company overhead costs (marketing and public relations, and company administration costs).
I then use the:
- Other income accounts for non-construction related income (e.g., rental, snow-plowing, and interest income
- Other expense accounts for taxes, interest and unusual or non-recurring costs.
This approach yields a “net ordinary income” subtotal that shows only the results of your construction company activities (so that you can more easily compare your results from year-to-year).
--Diane Gilson (firstname.lastname@example.org), created the accounting firm of Info Plus(+) Accounting® in 1994 with the intent of providing current and future-oriented management accounting services to small and medium-sized businesses. Since the firm’s inception, Diane has worked exclusively in QuickBooks® – a powerful, flexible, multi-functional software accounting system currently used by 70-85% of small to medium-sized businesses in the United States. She is a Certified QuickBooks® Advanced Professional Advisor and Certified QuickBooks Enterprise ProAdvisor (through Intuit), and a Certified QuickBooks® consultant (through the Sleeter Group Consultants Network).