How to Add Inventory to QuickBooks & Understanding the Limitations of Managing Inventory in QuickBooks Online

Inventory and QuickBooks Online: Understanding the Limitations of Managing Inventory in QBO

One of the most difficult things to manage in a business is inventory, and many clients come to me expressing difficulty with managing inventory in QBO.  Thank goodness we are experts in managing inventory in QBO!  Although QBO does not have the ability to manage complex inventory or manufacturing, like QB Desktop Enterprise, there certainly are elements of inventory that can be managed in QBO.  We can help you determine if you are a good fit for QBO Inventory. 


QuickBooks Online, a leading financial management and accounting software, offers customers robust tools for inventory management that can significantly enhance business operations. However, understanding its limitations is crucial for optimizing its use.

How to Add Inventory in QuickBooks

QuickBooks Online simplifies the addition of inventory items through a streamlined process that helps businesses keep accurate records of their stock levels.

1- Access the Products and Services Menu: To start adding the selling price to inventory, navigate to the "Products and Services" menu from the dashboard. This section allows you to manage all your inventory products efficiently.

2- Create a New Inventory Item: Select the "New" button and choose "Inventory" from the item type options. This is your first step in adding a new inventory item to QuickBooks Online.

3- Add your product's quantity, reorder point, and inventory asset account: While creating an inventory item, enter essential details such as the initial quantity on hand, reorder point to manage stock levels, and the inventory asset account that will be keeping track of the value of inventory within your balance sheet.

4- Enter the Item Details: Provide comprehensive details about the inventory item, including the product name, SKU, and description. These details are crucial for tracking purchase orders and managing inventory efficiently.

5- Save and Close: After entering all necessary details, click "Save and Close" to add the inventory item to your QuickBooks account.

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What are the Limitations of Managing Inventory in QuickBooks Online?

QuickBooks Online offers a range of features that make inventory management viable for many small to medium-sized businesses. However, like any tool, it has limitations that might affect its efficacy depending on the specific needs of a business. Understanding these limitations can help businesses plan better and decide whether they might need supplemental solutions or adjustments to their workflow.

Limited Customization of Inventory Processes

One of the primary drawbacks of QuickBooks Online is its limited flexibility in customizing inventory processes to fit unique business models or industry-specific needs. QuickBooks Online standardizes inventory management, which works well for general purposes but may not cater to the specialized requirements of certain sectors like manufacturing, where components and sub-assemblies are part of the production process.

Scalability Issues

As businesses grow, their inventory management needs become more complex. QuickBooks Online, while sufficient for smaller operations, may struggle to handle the increased volume and complexity of larger businesses. This includes limitations in handling large numbers of inventory items, batch processing, and advanced inventory needs such as serial number tracking or location-specific inventory.

Real-Time Inventory Tracking Limitations

QuickBooks Online does not offer real-time inventory tracking, which can be a significant limitation for businesses that require up-to-the-minute data to manage stock levels effectively. The system updates inventory levels at set intervals, which might not be sufficient for fast-paced environments where inventory levels fluctuate frequently throughout the day.

Reporting Limitations

QuickBooks Online provides a range of reporting features, but the depth and customizability of these reports may not meet the needs of all businesses. Companies that require detailed custom reports on inventory for analysis or strategic planning might find QuickBooks Online's reporting tools to be too basic. This can impact the ability to make informed decisions based on comprehensive inventory data.

Inventory Valuation Methods

QuickBooks Online offers inventory management features that help small businesses keep track of their inventory in real-time. Regarding inventory valuation, QuickBooks Online uses the FIFO (First-In, First-Out) costing method. This is an important consideration for businesses managing their accounting and inventory through QuickBooks Online, as the choice of inventory costing method can impact financial reporting and tax calculations.

Overview of FIFO in QuickBooks Online

FIFO is the only inventory costing method available in QuickBooks Online, implemented to align with standard accounting practices and simplify the user experience. Here's how FIFO works in QuickBooks Online:

  • Valuation Principle: Under FIFO, the cost of the oldest inventory items are the first to be expensed as cost of goods sold (COGS) when sales occur. This means that if prices are rising, the oldest, cheaper inventory is recognized first, potentially leading to higher reported profits and tax liabilities.
  • Inventory Purchases: When you purchase inventory, QuickBooks Online records the costs of these items at the time of purchase and adds them to the inventory asset account.
  • Sales Transactions: When sales are made, QuickBooks Online automatically calculates the cost of goods sold based on the cost of the oldest available inventory, reducing the inventory asset account accordingly and recording the COGS in the financial statements.
  • Benefits of Using FIFO in QuickBooks Online
    • Simplicity and Automation: QuickBooks Online automates the process of inventory valuation using FIFO, reducing the need for manual calculations and potential errors in COGS calculations.
    • Compliance and Reporting: Using FIFO can help ensure compliance with generally accepted accounting principles (GAAP) in the U.S., which favor FIFO over other methods like LIFO (Last-In, First-Out), which is not available in QuickBooks Online.
    • Inventory Management: FIFO can help businesses naturally rotate their stock, potentially reducing the issues related to product obsolescence, especially important for perishable goods.

Manual Data Entry and Error Handling

Despite its many automations, QuickBooks Online still relies heavily on manual data entry for inventory management, which increases the risk of human error. These errors can affect inventory accuracy, leading to issues with order fulfillment, stock levels, and financial reporting.

Best Ways to Manage Inventory Effectively

Effective inventory management is crucial for the success of any business that deals with physical goods. It ensures that capital is not tied up unnecessarily, and helps in maintaining the balance between supply and demand.

Here’s a comprehensive look at the best practices for managing inventory efficiently:

Implement an Inventory Management System

Adopting a robust inventory management system is essential for tracking product levels, orders, sales, and deliveries. Automated systems like QuickBooks Online provide valuable tools for inventory tracking, but for more complex needs, specialized inventory management software that can handle large volumes of data and provide detailed analytics may be necessary.

Utilize Just-in-Time (JIT) Inventory

The JIT inventory method involves keeping inventory levels as low as possible. This method reduces the cost of storage and minimizes waste, but requires precise planning and excellent communication with suppliers to ensure that products are available when needed, without causing delays or stockouts.

Practice ABC Analysis

This inventory categorization technique involves dividing inventory into three categories (A, B, and C) based on priority:

  • Category A items are high-value products with a low frequency of sales.
  • Category B items are moderate in value and sales frequency.
  • Category C items are low-value but high-frequency sales products.

This method helps focus resources on the most valuable items and optimizes the reordering process and stock levels.

Conduct Regular Audits

Physical inventory checks are crucial, even with an automated system. Regular audits, whether monthly, quarterly, or annually, help verify the accuracy of the inventory management system and address discrepancies right away. Common types of inventory audits include physical counts, spot checking, and cycle counting.

Set Reorder Points

To avoid stockouts, it's important to establish reorder points for each product. This is the minimum quantity that triggers the need to order more stock. Reorder points should consider lead times for receiving products and the buffer stock needed to satisfy customer orders during the reorder period.

Optimize Inventory Layout

Efficiently organizing the physical space where inventory is stored can save time and reduce errors during order fulfillment. This involves placing high-selling items in accessible areas and grouping similar items together. A well-organized warehouse ensures that older stock (based on FIFO or LIFO principles) is accessible and reduces the time spent picking items for orders.

Leverage Dropshipping or Cross-docking

For businesses looking to minimize their inventory handling processes, dropshipping and cross-docking are effective strategies. Dropshipping allows businesses to transfer customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. Cross-docking involves unloading materials from an incoming semi-trailer truck or railroad car and loading these materials directly into outbound trucks, trailers, or rail cars, with little or no storage in between.

Embrace Technology and Automation

Advanced technologies such as RFID tags, barcode scanners, and automated storage and retrieval systems (ASRS) can dramatically improve inventory management. These technologies enhance tracking accuracy, reduce labor costs, and speed up the processing of inventory data.

Using QuickBooks for Inventory Tracking

Inventory tracking in QuickBooks Online is a robust feature that helps businesses monitor their stock levels, cost of goods sold non inventory items, and overall inventory value efficiently. Here's a deeper look into how using QuickBooks can streamline inventory management processes:

  • Real-Time Inventory Monitoring

QuickBooks Online provides tools that allow businesses to monitor their inventory levels in real time. This is crucial for maintaining accurate stock counts and ensuring that information is up-to-date. Real-time monitoring helps in preventing stockouts and overstock situations, allowing businesses to respond quickly to changes in demand.

  • Tracking Cost of Goods Sold

An essential aspect of inventory management in QuickBooks is its ability to track the cost of goods sold (COGS). This feature automatically updates COGS as sales occur, providing insights into the profitability of products sold. It calculates COGS based on the inventory valuation method chosen by the business (such as average cost), which impacts financial reporting and decision-making.

  • Managing Non-Inventory Items

In addition to inventory items, QuickBooks Online also handles non-inventory items. These are items purchased for consumption within the business or for resale that do not require inventory tracking. Examples include office supplies or products that are typically used in services. Tracking these items is crucial for accurate expense management and can help in budgeting and forecasting.

  • Assessing Overall Inventory Value

QuickBooks provides comprehensive tools to assess the overall value of inventory, which is vital for accurate financial reporting. The inventory value report shows the total value of your inventory at any given time, reflecting how much capital is tied up in stock. This information is crucial for financial planning and helps in making informed purchasing decisions.

  • Integration with Sales and Purchasing

The integration of inventory management with sales and purchasing within QuickBooks ensures a seamless flow of data across business operations. When a sale is made, inventory levels are automatically adjusted, and similarly, when a purchase order is placed, QuickBooks updates the stock levels once the inventory is received. This automatic synchronization helps maintain balance and accuracy across all transactions.

  • Customizable Reports for Enhanced Insights

QuickBooks allows users to generate customizable reports that provide deeper insights into inventory management. Businesses can create detailed reports on inventory aging, turnover rates, and order history, which are invaluable for analyzing trends and planning future inventory needs. These reports help in identifying fast-moving items, seasonal variations in sales, and potential issues with stock levels.


While QuickBooks Online is a powerful tool for basic inventory management, its limitations can pose challenges for businesses with complex inventory needs or those experiencing rapid growth.

Businesses should evaluate these limitations carefully and consider whether additional tools or software enhancements are needed to fully support their inventory management processes. For many, QuickBooks Online will serve as a robust starting point, but ongoing assessment and adaptation will be crucial as business needs evolve.

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