Why Inventory Valuation Matters
Inventory is your largest asset as a seller. How it's valued directly impacts:
- Cost of Goods Sold (COGS) on your P&L
- Taxable income and tax liability
- Working capital and cash flow
- Loan eligibility and valuations
Accurate inventory tracking prevents audit issues and identifies profit leaks (obsolete stock, shrinkage, damage).
QuickBooks Inventory Valuation
Enabling Inventory in QBO
- Available in Plus and Advanced plans only (Essentials doesn't include inventory)
- Settings → Account and Settings → Sales → Products and Services → Turn ON
- Creates inventory accounts automatically
FIFO vs Average Cost in QB
| Method | QB Default? | How It Works | Best For |
|---|---|---|---|
| FIFO | No (Manual) | Oldest cost assigned first | Rising costs, perishables |
| Average Cost | Yes (Default) | Weighted average per unit | Stable margins, simpler tracking |
Setting Unit Cost
- Go to Products & Services → Product Name → Edit
- Enter "Cost" (your landed cost per unit)
- QBO uses this cost for COGS when items sell
- Update cost regularly as supplier prices change
Creating Bill & Inventory Purchase
- Create Bill from supplier
- Category: Inventory Asset account (1100)
- QB automatically updates inventory quantity and value
- When inventory sells (via invoice), QB decreases inventory and increases COGS
Inventory Reconciliation in QB
- Monthly: Run Inventory Valuation Summary report
- Compare system quantity to physical count
- If difference: Adjust Qty on Hand via Inventory Adjustment entry
- QB recalculates COGS automatically
Xero Inventory Valuation
Inventory Tracking in All Plans
- Inventory tracking included in all Xero plans (not restricted to premium)
- Unlimited inventory items
- Better for sellers with 500+ SKUs
Valuation Method: Weighted Average (Default)
| Feature | Xero Standard | Notes |
|---|---|---|
| Method | Weighted Average Only | No FIFO option in standard |
| Calculation | Automatic after each purchase | Average updates real-time |
| For Sellers | Simplifies COGS calculation | Good for consistent pricing |
Xero Inventory Setup
- Business → Products and Services → Create New Product
- Enter product code, description, tracked (YES)
- Set unit cost (purchase price from supplier)
- Set selling price (for invoicing)
Xero Inventory Adjustments
- Business → Inventory → Adjustment
- Use for shrinkage, damage, write-downs
- Creates journal entry automatically
- Recalculates weighted average after adjustment
QB vs Xero: Inventory Comparison
| Feature | QuickBooks | Xero |
|---|---|---|
| Inventory Available In | Plus, Advanced plans only | All plans |
| Valuation Methods | Average Cost (default), FIFO (manual) | Weighted Average only |
| SKU Limit | Limited (~3,000) | Unlimited |
| Multi-Location | Limited support | Better support |
| Batch Tracking | No | Limited |
| Automated COGS | Yes (average cost) | Yes (weighted average) |
| Manual Adjustment | Easy (Inventory Adjustment) | Easy (Adjustment) |
Physical Inventory Reconciliation
Why Physical Counts Matter
- System records ≠ actual warehouse (shrinkage, damage, counting errors)
- IRS requires documented physical counts for inventory
- Identifies theft, waste, or data entry mistakes
- Adjustments must be made to match actual on-hand
Physical Count Process
- Prepare: Print inventory list from QB/Xero (quantities and values)
- Count: Physically count each SKU in warehouse
- Reconcile: Compare actual count to system count
- Investigate: Identify discrepancies (missing shipments, receiving errors, damage)
- Adjust: Make adjustment entries in QB/Xero for differences
Common Discrepancies & Solutions
| Issue | Cause | Fix |
|---|---|---|
| System shows 100, actual 90 | Shrinkage, damage, theft | Adjustment: -10 units, expense account |
| System shows 50, actual 60 | Receiving not recorded in system | Check receiving log, create bill in QB/Xero |
| System shows $5,000, actual worse condition | Units damaged or obsolete | Write-down: reduce unit cost or expense |
Adjustment Entry in QB
- + / Inventory Menu → Inventory Adjustment
- Reference: "Physical Count - Nov 2025"
- Select items with differences
- QB calculates adjustment to COGS automatically
Adjustment Entry in Xero
- Business → Inventory → Adjustment
- Select product, adjust quantity
- Choose account: Inventory Loss or Adjustment account
- Xero recalculates weighted average
Write-Downs and Obsolete Inventory
Seller inventory often becomes obsolete or damaged. Proper write-down accounting is essential:
| Scenario | QB Treatment | Xero Treatment | Tax Impact |
|---|---|---|---|
| Damaged units (50) | Inventory Adjustment, reduce qty to 0 | Adjustment, reduce qty to 0 | Deductible loss |
| Obsolete SKU worth $2K | Reduce unit cost per item, expense difference | Adjustment entry to write-down | Deductible loss |
| FBA stranded inventory | Manual adjustment entry (QB doesn't auto-detect) | Manual adjustment | Deductible if removed from sale |
Landed Cost Allocation
For accurate COGS, include landed cost (product + freight + tariffs + duties):
- QB: Manually calculate landed cost per unit, enter as "Unit Cost"
- Xero: Same process; track in purchase invoice line items
- Formula: (Product Cost + Freight + Tariffs) ÷ Units = Landed Cost/Unit
- Example: ($5,000 product + $500 freight + $200 tariffs) ÷ 1,000 units = $5.70/unit
Multi-Channel Inventory Reconciliation
Challenge: Amazon FBA, Shopify, and warehouse inventory live in different systems. Manual reconciliation is error-prone.
Solution: Use apps like Stitch Labs or Inventory Lab that pull from all channels and feed into QB/Xero automatically.
Summary: Inventory Valuation Best Practices
Monthly: Reconcile system to physical counts; adjust discrepancies
Calculate Landed Cost: Include freight, tariffs, duties in unit cost
Track Write-Downs: Remove damaged/obsolete inventory with journal entries
QB Users: Choose between average cost (automatic) or FIFO (manual)
Xero Users: Use weighted average; simpler but less flexible
Audit-Ready: Keep physical count records, reconciliation workpapers for 7 years