QuickBooks for Flippers - Inventory vs COGS

[Mauricio Duarte]

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!

[Vince Wagner]

Quote from @Gita Faust:

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.

I realize this is reviving a very old thread but @Mauricio Duarte were you able to get your books in order? The advice of @Gita Faust is correct and I would not follow the advice Scott is getting from his CPA - they are probably just telling him what is easiest for his taxes.

If I were to look at the books we cannot know what he has in progress and what his profit and loss has been on activities for the year. I tried countless hours to use P&L only within Quickbooks using projects and it does not work. 

I would pull up the sub accounts in the balance sheet if you needed to look back at historical granular detail. Just because you zero it out with the journal entry it is all there and can be exported to excel. 

I hope this helps

  

[Gita Faust]

Quote from @Mauricio Duarte:

@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.

 You have a few options:

1. Create one JE and offset against each account and on PL post it to one account or

2. Create a new Balance Sheet account, name it something like offset, and use that account, which will end up as a negative amount, and the total amount will be zero on the BS.

What you want to do is create subaccounts, so you can pull a summary report and then collapse the rows in QuickBooks Online. That way, no one knows the details behind the scene.

As an accounting advisor, my goal is to customize the setup and reports per the needs of an investor, lender, or CPA, and anyone else who needs them. Many track details in different software by using features, and then there are those who take shortcuts and use Excel and accounting software such as QuickBooks Online duplicating their efforts.

[Juan Carlos Gomez]

Hello, is the Mortgage principal included in COGS?

[Juan Carlos Gomez]

Hello, is the Mortgage principal included in COGS?