QuickBooks for Flippers - Inventory vs COGS

Rehabbing & House Flipping
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QuickBooks for Flippers - Inventory vs COGS

Mauricio Duarte
Member since 2019 · 15 posts · 3 votes

Hi everyone!

Newbie here. Please be kind. 

I've recently formed an LLC with a partner to flip houses. We've purchased our first property and the project is underway. I'm a CPA (originally an auditor, now in consulting), so I understand the importance of keeping accurate accounting records. I've signed up for Quickbooks to help with that.

I’ve read a lot on here about capitalizing all expenses during construction to inventory and then moving those expenses to COGS once the property is sold—makes complete accounting sense. However, from the little I know so far about QuickBooks, it just doesn’t seem that it’ll help with maintaining historical data. I have set up WIP accounts for WIP LABOR and WIP MATERIALS. Each of those WIP accounts are assigned Classes (Landscaping, Flooring, Light Fixtures) so I can run reports later to help me better budget future flips. NOTE: I use the Customer/Project field to assign properties to my transactions (I know some people use Classes instead).

But here’s what I fail to understand. When the property sells and I transfer all these transactions to COGS by posting a journal entry, I will lose all of this granularity. Unless I create corresponding COGS accounts (i.e., COGS LABOR and COGS MATERIALS) and post individual journal entries to assign each transaction a Class (which is a lot of work), I will lose all the detail I’ve been accumulating in Inventory up until the sale. 

Am I missing something here? Why not just post all transactions during the rehab directly to COGS? The only issue I see with doing this is if you have a property that is in construction between two different fiscal years. If you charge everything to COGS and the property is not finished by the end of the fiscal year, you’d need to move those costs to Inventory and then back to COGS once the property sells. 

For those of you who are more familiar with QuickBooks and post the costs during rehab to Inventory, could you please let me know what you do to transfer those costs to COGS and not lose all the detail for reporting purposes? Maybe the answer is not to post journal entries, but to just change the accounts where the transactions are mapped once the property sells, which is still a lot of work. 

Please help. Thanks!

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
7y

Personally, I count everything as cogs from the beginning. I create granular cogs categories and record work-in-progress as Cogs.  At the end of the year, if a property hasn't sold, I will do a journal entry to move the entire balance of that account to work in progress.

To make that simpler, I will use classes to track the expenses to the properties.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    7y

    Personally, I count everything as cogs from the beginning. I create granular cogs categories and record work-in-progress as Cogs.  At the end of the year, if a property hasn't sold, I will do a journal entry to move the entire balance of that account to work in progress.

    To make that simpler, I will use classes to track the expenses to the properties.

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    3Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y
    Originally posted by @J Scott:

    Personally, I count everything as cogs from the beginning. I create granular cogs categories and record work-in-progress as Cogs.  At the end of the year, if a property hasn't sold, I will do a journal entry to move the entire balance of that account to work in progress.

    To make that simpler, I will use classes to track the expenses to the properties.

    Thanks, @J Scott. I’ve read your posts on here (and just purchased two of your books on Amazon), so I know you’re a big proponent of posting everything to COGS. I’ve started putting everything to Inventory, but don’t have a ton of transactions yet, so I figured I still have time to change my approach. I’m just curious as to what the people who post it to Inventory initially do when the house sells and how it affects their reporting.

    @J Scott, how do you break down your COGS accounts so that you know what you spent money on? As I explained, I’m using classes to track spending categories (landscaping, flooring, etc). I use Customer/Projects to assign transactions to a property. Do you have several accounts for COGS-Landscaping, COGS-Flooring, etc.?

    I found out after purchasing your books that they come with a chart of accounts if purchased on here instead of on Amazon. Big mistake on my part.

    Thanks again for the reply. 

    0Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y

    Tagging didn’t work for some reason in my last reply. Just want to make sure @J Scott sees this. Thanks!

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    7y
    Originally posted by @Mauricio Duarte:
    Originally posted by @J Scott:

    Personally, I count everything as cogs from the beginning. I create granular cogs categories and record work-in-progress as Cogs.  At the end of the year, if a property hasn't sold, I will do a journal entry to move the entire balance of that account to work in progress.

    To make that simpler, I will use classes to track the expenses to the properties.

    Thanks, @J Scott. I’ve read your posts on here (and just purchased two of your books on Amazon), so I know you’re a big proponent of posting everything to COGS. I’ve started putting everything to Inventory, but don’t have a ton of transactions yet, so I figured I still have time to change my approach. I’m just curious as to what the people who post it to Inventory initially do when the house sells and how it affects their reporting.

    @J Scott, how do you break down your COGS accounts so that you know what you spent money on? As I explained, I’m using classes to track spending categories (landscaping, flooring, etc). I use Customer/Projects to assign transactions to a property. Do you have several accounts for COGS-Landscaping, COGS-Flooring, etc.?

    I found out after purchasing your books that they come with a chart of accounts if purchased on here instead of on Amazon. Big mistake on my part.

    Thanks again for the reply. 

    Within COGS, I have Labor and Materials sub-accounts.  Then I have sub-accounts under each of those for the areas I want to track.  For example, roofing, painting, cabinets, flooring, electrical, plumbing, HVAC, etc.  The categories match up pretty well with the 25 components I call out in my Estimating Rehabs books.

    Btw, this is the way my accountant recommended I set up QB...he's the one who moves everything to WIP at the end of the year for the properties that haven't yet sold.  He handles those journal entries and then reversing them when the property sells.

    And if you purchased the book(s), send me a PM and I'll send you the COA...

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    1Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y

    @J Scott, I see. I wonder if the sub-sub-accounts you described might work better than using Classes to assign categories. I’ll have to play with it.

    I haven’t gotten to the Estimating Rehabs book yet. Still on chapter 3 of The Book on Flipping Houses. Good read so far and informative.

    Thanks a lot! I sent you an invitation to connect. I believe that’s the only way I can PM you (also new to Bigger Pockets—I was lurking before). 

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    7y
    Originally posted by @Mauricio Duarte:

    @J Scott, I see. I wonder if the sub-sub-accounts you described might work better than using Classes to assign categories. I’ll have to play with it.

    I haven’t gotten to the Estimating Rehabs book yet. Still on chapter 3 of The Book on Flipping Houses. Good read so far and informative.

    Thanks a lot! I sent you an invitation to connect. I believe that’s the only way I can PM you (also new to Bigger Pockets—I was lurking before). 

    I use Classes to designate the specific property.  Then I can do a P&L by Class to look at the numbers for each property.

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    1Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y
    0Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y

    @J Scott, how do you account in QuickBooks for an item that you purchase, say, from Home Depot, but later returned? I posted a different thread but have not received a reply. QuickBooks customer support has been no help either.

    Here's the thread that explains the issue a little better: 

    https://www.biggerpockets.com/forums/67/topics/716...

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    7y

    I don't really understand the problem.  When you return an item, if it's on a credit card, you can just enter a credit card transaction for a refund and apply it to a COGS account.  See here:

    https://i.imgur.com/MFyvd4T.jpg

    If it's through an account where you can do this, why not do a Journal Entry that credits your COGS account and debits your bank account?  See here:

    https://i.imgur.com/bDp0fHu.jpg

    Or is there something else I'm missing?

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    1Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y

    @J Scott, it looks as though you're using a Desktop version of QuickBooks. Is that correct?

    I'm using QuickBooks Online. On QuickBooks Online, they have an Expenses screen which shows all of your expenses to date. When you purchase an item (I'm using a checking account for all my transactions, not a credit card) and then later return it, there's apparently no way (as far as I know) to post a return/refund transaction so that the Expenses screen appropriately reflects your total expenses for the year. So if your total expenses on the Expenses screen is $1,000, but you return an item for $10, you'd expect your total expenses to now show $990. Well, it doesn't because there's no way to post a return/refund. So it still shows $1,000. Expenses are essentially overstated, even though the P&L is correct (when I download transactions from the bank, it allows me to tell which account on the COA I want the credit to post to, but the Expenses screen doesn't update).

    Journal entries also don't show up on this screen. It's weird. I've spoken to customer service about it. I might just switch to a desktop version after this flip. Is that what most people use?

    0Reply
  • Gita FaustBusiness Member
    Accountant · Richboro - Philadelphia, PA · Member since 2008 · 908 posts · 246 votes
    7y

    Accounting for real estate flips

    All money spend before the sale should be posted to the Balance Sheet for that specific property. 

    All money spend after the sale of the property should be posted to Profit & Loss.

    And yes on the day of the sale you transfer the pruchase price, loan cost, settlement cost, imporvements to Profit & Loss. 

    You do not loose any data, as long as your QuickBooks is set up right and you have a process and procedure to record the transactions.

    So let me ask you a questions, say you post it to COGS - and I ask you what your profit is for this year.  You would go right to QuickBooks and pull your Profit & Loss and Balance Sheet. Which is going to be inaccuate. So now you open your excel sheet and type in the numbers to calculate if you had a loss or profit. Doing so you you understated your assets, and overstated your expenses. That is not accounting. You are trying to take a short cut to make it convienient for you. If an Accountant, a CPA or a tax preparer or anyone who is giving you this advice ...... ( I am not saying anything ).

    Here is another think - as you are flipping properties you do know that you are supposed to pay estimated Income Tax on your gains. How are you going to figure it out if your reports are inaccurate. 

    Next applying or asking for loan. You would need your financials right? 

    Look at your Balance Sheet your Assets are understated and your equity in the business is??????

    It is not work. You are already entering the info - learn to use a software the right way the first time around and it becomes second nature to you just like fixing a leaky faucet.

    2Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y

    @Gita Faust,

    Accounting wise, I completely agree with what you’re saying. But I don’t see how it can easily be accomplished in QuickBooks. So help me understand how this would work.

    Let’s say that I spent $500 on Tile at Home Depot and I initially put it to WIP Inventory > Tile. Now when the house sells, I post a journal entry to move that $500 to COGS. But I want it to go to COGS > Tile so that I can see that same breakdown on the P&L (so that I can, say, create a budget later on if I need to).

    In order to do that, I’ll have to post the following journal entry:

    Dr. COGS > Tile  $500

    Cr. WIP Inventory > Tile  $500

    But let’s say I’ve spent $30k on this rehab and I have two dozen different accounts in WIP (tile, carpet, drywall, etc.) Are you telling me that I’ll have to post god knows how many different journal entries to move all of these transactions from one account in Inventory to a corresponding account in COGS? That’s INSANE! That’s why I’m saying it’s too much work for very little return. 

    Hard money lenders don’t want to see my accounting records. They care about the asset and how much money I have in my checking account. I won’t be hiring a CPA to do my taxes. I’ll be doing them myself (I am a CPA). So at any point in time, I know where the business stands. I know that expenses are overstated and assets are understated. No one else is looking at that info but me anyway. Why would I put myself through the trouble of posting all these different journal entries to move dozens of transactions from Inventory to COGS just to follow proper accounting that no one will see?

    If that’s not how QuickBooks works and there’s an easy way to easily flip (pun intended) all these transactions from Inventory to COGS with the push of a button, please enlighten me. I’m new to the software and would love to learn.

    0Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y

    @Gita Faust, not sure why tagging doesn’t work sometimes on this forum. 

    0Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y

    As for the estimated income taxes, there’s no gain until I actually sell the house, at which point everything would be in COGS anyway—under your method or J Scott’s method—so I’ll know how much net income was generated and can easily estimate income taxes. I don’t see the problem there.

    As a matter of fact, using the COGS method, I can generate a P&L by Property at any time. You can’t do that when all your costs are on the Balance sheet. I tried. That report doesn’t exist—at least not for QBO Plus.

    1Reply
  • Dan V.
    Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 202 votes
    7y

    To be honest, I like J Scott's approach for 2 reasons. 1st, it's easier to drill thru the COGS details since everything is posted there, 2nd, you can run budget vs actual if you plan to utilize the Budgeting feature to track your progress directly from QBO. It is more of a work around rather than a shortcut. And as long as you keep in mind that COGS for unsold properties needs to be moved to balance sheet to get an accurate financials, then I think it's not a bad idea. 

    @Mauricio Duarte I don't recommend using Expense screen to view all your expenses since that may not capture all transactions, ie. refund from store processed as deposit or journal entry. I suggest running financial reports (ie P&L or balance sheet) instead. For flips, we usually create custom report to keep track of the project costs and another report to show historical data of all sold properties as percentage of income. 

    Journal entry can be found in the "+" sign in the upper right hand corner, then under the "Other" group. Again, journal entries will not show up in the Expenses window. 

    As Gita mentioned, it's important to set up your books and accounting process the right way, the first time. 

    2Reply
  • Mauricio Duarte
    OP
    Member since 2019 · 15 posts · 3 votes
    7y
    Originally posted by @Dan V.:

    To be honest, I like J Scott's approach for 2 reasons. 1st, it's easier to drill thru the COGS details since everything is posted there, 2nd, you can run budget vs actual if you plan to utilize the Budgeting feature to track your progress directly from QBO. It is more of a work around rather than a shortcut. And as long as you keep in mind that COGS for unsold properties needs to be moved to balance sheet to get an accurate financials, then I think it's not a bad idea. 

    @Mauricio Duarte I don't recommend using Expense screen to view all your expenses since that may not capture all transactions, ie. refund from store processed as deposit or journal entry. I suggest running financial reports (ie P&L or balance sheet) instead. For flips, we usually create custom report to keep track of the project costs and another report to show historical data of all sold properties as percentage of income. 

    Journal entry can be found in the "+" sign in the upper right hand corner, then under the "Other" group. Again, journal entries will not show up in the Expenses window. 

    As Gita mentioned, it's important to set up your books and accounting process the right way, the first time. 

    Dan, how do you set up the report to view all sold properties as a % of net income? Is there a report for that or do you need to customize one? If the latter, how?

    0Reply
  • Dan V.
    Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 202 votes
    7y

    @Mauricio Duarte Either approach (inventory or COGS) will be able to get you the project progress report, so it's a matter of preference so if you think COGS approach works better for your purpose then go with it. 

    The P&L percentage report can be found under the Business Overview report group > Profit and Loss as % of total income.  You can play around the options, but it should give you percentage of total income or percentage of net income option, at least. You can filter out the class to include only sold properties. 

    0Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @J Scott:

    Personally, I count everything as cogs from the beginning. I create granular cogs categories and record work-in-progress as Cogs.  At the end of the year, if a property hasn't sold, I will do a journal entry to move the entire balance of that account to work in progress.

    To make that simpler, I will use classes to track the expenses to the properties.

     J, came across this post from last year and for the first time I am running into a project that significantly overlaps tax years.

    I use your CoA for Quickbooks and your general Cogs accounting technique.  Can you give a bit more detail about how you General Journal Cogs over to a WIP account at year end?

    I don't have any experience with WIP. You are talking about moving the Cogs to the balance sheet? If so, to be specific, do you create separate WIP asset accounts for each COGS account, or can you just accumulate all your COGS for a property and put it in one WIP sub account under the Main property asset account?

    Thanks

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    5y
    Originally posted by @Eric M.:

    J, came across this post from last year and for the first time I am running into a project that significantly overlaps tax years.

    I use your CoA for Quickbooks and your general Cogs accounting technique.  Can you give a bit more detail about how you General Journal Cogs over to a WIP account at year end?

    I don't have any experience with WIP. You are talking about moving the Cogs to the balance sheet? If so, to be specific, do you create separate WIP asset accounts for each COGS account, or can you just accumulate all your COGS for a property and put it in one WIP sub account under the Main property asset account?

    Thanks

    Hey Eric,

    This is how my accountant (and therefore I) do it...

    1.  Create a "Fixed Asset" account called "WIP" (Work in Progress) or "Flip Inventory" (this is the account used to move the COGS to in order to move it off the P&L

    2.  Create a "Cost of Goods Sold" account called "WIP Reclass for Year End" (this the account account used to offset the COGS moved to the balance sheet)

    3.  On December 31 of the tax year, do a General Journal entry that moves the total amount of COGS from flips in progress onto the balance sheet (specifically, credit the WIP Reclass account and debit the Flip Inventory account).  If you want, you can do a separate journal entry for each project in progress.  Here's an example of what the journal entry looked like on 12/31/2019 for the two projects I had in progress in one of my companies:

    In this case, I was $84K into my 21st Street project (not yet completed) and $176K into my N Morgan project (not yet completed).

    Now, when you run a P&L through 12/31, you see that these two amounts are credited back to the COGS, so these costs aren't recognized in that tax year.  And you'll see them show up as inventory on your balance sheet.

    4.  On January 1 of the following year (the next day), you reverse the journal entry to move those projects back to COGS from inventory.  Like this:

    Let me know if there's anything that doesn't make sense there!

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    1Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    5y

    Ok thanks, I was wondering if you go ahead and reverse on Jan 1 but probably doesn't matter if you reverse Jan 1 or when you sell in 2021.

    I appreciate the help.

    0Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    5y


    Originally posted by @J Scott:

    And ALL costs directly attributed to the property are COGS? Including insurance, interest expense and other less "direct" cast other than rehab?

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    5y
    Originally posted by @Eric M.:

    Ok thanks, I was wondering if you go ahead and reverse on Jan 1 but probably doesn't matter if you reverse Jan 1 or when you sell in 2021.

    I appreciate the help.

    My accountant does the journal entries, and he reverses on Jan 1. 

    This is good because it allows me to run reports throughout the year that still make sense (but wouldn't if there were unreversed transactions.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    5y
    Originally posted by @Eric M.:


    Originally posted by @J Scott:

    And ALL costs directly attributed to the property are COGS? Including insurance, interest expense and other less "direct" cast other than rehab?

     I believe some of those costs can be expensed.  But, for accounting simplicity sake, we apply them all to COGS and treat them the same as the purchase and renovation expenses.  We may be pushing out some deductions each year, but it's a relatively small amount and the value of easy accounting a worthwhile tradeoff.

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    0Reply
  • Chris Meadors
    Real Estate Agent · Napa · Member since 2019 · 15 posts · 7 votes
    4y

    This thread is super informative. I was just argueing with my CPA about this today. Do you operate in a way that is "technically correct" for the CPA's liking, or do you operate in a way that works for your business? I feel like lenders can read through an P&L that might not be technically correct, because you can explain that "project ABC is underway, I'm down $100k on it, but it's set to hit the market in June and we're going to sell it for XYZ."   What do most FLIPPERS in this group opt for?  

    and @Mauricio Duarte - how's it all working out for you 3 years later (if you're still around?)

    0Reply
  • Adam Hays
    Investor · Blue Springs, MO · Member since 2015 · 34 posts · 6 votes
    3y
    Quote from @J Scott:
    Originally posted by @Eric M.:

    J, came across this post from last year and for the first time I am running into a project that significantly overlaps tax years.

    I use your CoA for Quickbooks and your general Cogs accounting technique.  Can you give a bit more detail about how you General Journal Cogs over to a WIP account at year end?

    I don't have any experience with WIP. You are talking about moving the Cogs to the balance sheet? If so, to be specific, do you create separate WIP asset accounts for each COGS account, or can you just accumulate all your COGS for a property and put it in one WIP sub account under the Main property asset account?

    Thanks

    Hey Eric,

    This is how my accountant (and therefore I) do it...

    1.  Create a "Fixed Asset" account called "WIP" (Work in Progress) or "Flip Inventory" (this is the account used to move the COGS to in order to move it off the P&L

    2.  Create a "Cost of Goods Sold" account called "WIP Reclass for Year End" (this the account account used to offset the COGS moved to the balance sheet)

    3.  On December 31 of the tax year, do a General Journal entry that moves the total amount of COGS from flips in progress onto the balance sheet (specifically, credit the WIP Reclass account and debit the Flip Inventory account).  If you want, you can do a separate journal entry for each project in progress.  Here's an example of what the journal entry looked like on 12/31/2019 for the two projects I had in progress in one of my companies:

    In this case, I was $84K into my 21st Street project (not yet completed) and $176K into my N Morgan project (not yet completed).

    Now, when you run a P&L through 12/31, you see that these two amounts are credited back to the COGS, so these costs aren't recognized in that tax year.  And you'll see them show up as inventory on your balance sheet.

    4.  On January 1 of the following year (the next day), you reverse the journal entry to move those projects back to COGS from inventory.  Like this:

    Let me know if there's anything that doesn't make sense there!


     Could you accomplish the same thing and help to create a more accurate balance sheet, as @Gina Faust suggest, by periodically (weekly, monthly) doing the same thing as year end?

    By using the WIP Reclass Account we maintain all of our Project and Class integrity for the QB Online Reporting and Project bells and whistles, and this seems easy to explain on a balance sheet as a sub account of COGS

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