close · Lesson 3 · 9 min
Inventory and cost of sales
If you hold materials for resale or a job, they are an asset until used. Then they become cost of sales, not “office.”
Dotted words have a reminder. Hover on a computer, tap on a phone.
From earlier
- AP
- QBO
- P&L
- AR
Perpetual, in outline
Buy mulch to sell or install: debit Inventory, credit AP or bank. Use it on a job: debit Direct materials (COGS / Xero Direct Costs), credit Inventory. Revenue is separate — invoicing the client does not, by itself, move inventory unless an item is set to track quantity.
| Account | Debit | Credit |
|---|---|---|
| 5000 Direct materials | $220.00 | |
| 1300 Inventory — materials | $220.00 | |
| Totals | $220.00 | $220.00 |
Periodic, still valid
Many small service firms expense materials as bought, then at month-end count stock and journal the movement: if inventory rose $300, debit Inventory, credit Direct materials (reducing COGS). If it fell, the opposite. A count is the source document. No count, no journal.
Xero inventory items
Tracked items post the COGS journal when you invoice. Untracked items do not. Do not turn tracking on mid-year without an opening quantity and value. Xero is not a warehouse WMS; for serious stock, an inventory app usually sits on top.
Direct costs vs overhead
Mulch on a job is direct. Rent for the shed is overhead (expense). Subcontractors on a billed job are usually direct costs so gross margin means something. Putting everything in “Office” makes the P&L a list, not a tool.
Check
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Choose an answer, then check.
This try
Buying $800 of resale materials on account should first: