In a prior blog post we discussed sales versus income. Today we will dive into another set of similar terms that have different meanings in QuickBooks.
When working in QuickBooks, it’s essential to understand how the terms “purchases” and “expenses” are used. These terms may seem straightforward in everyday language, but in QuickBooks, they carry specific meanings that affect how transactions are recorded and how reports are generated.
If you don’t fully understand the difference, it could lead to confusion and even reporting errors. What we are explaining here applies to QuickBooks terminology—not the real-world definition of these words. In both cases, recording a purchase or expense often affects an expense account or cost of goods sold (COGS) account, but the method you use determines how it shows up on your reports. Let’s break it down.
How Purchases and Expenses Are Used Differently in QuickBooks
In QuickBooks, when you use certain transaction types—like purchase orders, bills, checks, expenses, vendor credits, and credit card credits—combined with a product or service item, it’s considered a purchase.
For example, imagine your company sells custom fountains. When you purchase a fountain from your supplier, you record that transaction as a purchase in QuickBooks. Here’s how:
- You write a check to the vendor in QuickBooks, which is a purchase transaction.
- You select the fountain item in the check’s Items grid, and the fountain is mapped to a COGS or expense account.
- This transaction is considered a purchase and will appear on QuickBooks’ Purchase Reports.
But here’s where it gets tricky. You could also record that same purchase as an expense without it being recognized as a purchase in QuickBooks. How? Either by recording the transaction on a check (or other purchase transaction type) directly to the COGS or expense account and not using a Product/Service item or by skipping the purchase transaction form and directly debiting an expense account through a journal entry. Neither of these approaches will show up on Purchase Reports—because QuickBooks doesn’t consider either of these a purchase.
While recording an expense directly through a journal entry might seem simpler, it’s not recommended for purchases tied to items you sell. These transactions should always be recorded using the appropriate purchase transaction type AND a product/service item, ensuring they appear in Purchase Reports for accurate tracking and reporting.
Valid Non-Purchase Expenses
Not every expense in QuickBooks needs to be recorded as a purchase. Some financial activities—like depreciation or overhead costs—are rightfully recorded as expenses and not as purchases.
For example:
- Depreciation Expense is recorded via a journal entry. You select the depreciation expense account in the Account dropdown, with no product or service item involved. This journal entry won’t show up on Purchase Reports, nor should it.
- Rent payment recorded directly to the rent expense account on a check will not be included on QuickBooks Purchase reports.
Setting Up Items for Purchases in QuickBooks
If you’re recording purchases using items, it’s critical to ensure your items are set up correctly. Specifically, they need to be double-sided items, meaning they can be used on both sales and purchase transactions. This feature is available only in QuickBooks Online Plus and Advanced subscriptions.
How to Set Up Double-Sided Items
- Go to the Gear icon > Accounts and Settings.
- Click the Expenses tab.
- In the “Bills and Expenses” section, enable “Show Items table on expense and purchase forms.” This adds an Items grid to purchase forms.
- Review other settings, such as billable expenses and markups, and adjust as needed.
Next, go to the Products and Services screen. For each item you want to use for purchases:
- Edit the item and scroll to the Purchasing Information section.
- Check “I purchase this product/service from a vendor.”
- Fill out the relevant information, especially the Expense account field.
QuickBooks Purchase Transaction Types
You’re probably familiar with these transaction types, but let’s quickly review them in the context of purchases. All these transactions are found in the +New menu under the Vendors column:
- Purchase Order: A non-posting transaction used to tell a vendor you want to order goods or services. Available in Plus and Advanced.
- Bill: Entered when you receive a bill from a vendor but plan to pay it later. Increases accounts payable and typically affects expense accounts.
- Bill Payment: Used to pay bills you’ve entered. Reduces accounts payable and is recorded from a bank or credit card account.
- Vendor Credit: The opposite of a bill. Used to record a refund from a vendor, reducing accounts payable.
- Expense: A quick way to enter cash, check, or credit card purchases in one window. Note: You can’t print checks entered from this window.
- Check: Used to enter transactions that reduce your bank account. You can assign check numbers or print checks later.
- Credit Card Credit: Records a credit card refund from a vendor.
Reporting on Purchases and Expenses
Understanding how purchases and expenses affect your reports is key to interpreting your financial data accurately.
Purchase Reports
Purchase Reports in QuickBooks show only transactions recorded using purchase transaction types and product/service items. Examples of these reports include:
- Purchases by Vendor Detail
- Purchases by Class Detail
- Purchases by Product/Service Item Detail
- Purchases by Location Detail
Profit & Loss Report
The Profit & Loss (P&L) Report provides a broader view, including all activity posted to expense accounts—whether it’s from a purchase transaction or a direct journal entry. By drilling down into these accounts, you can see the details of each transaction.
However, using items on purchase transactions offers more detailed insights. You can customize a P&L report to show columns by item, allowing you to track the profitability of individual products and services.
Conclusion
Understanding the difference between purchases and expenses in QuickBooks isn’t just about terminology—it’s about ensuring your financial records are accurate and your reports give you the insights you need to make informed decisions.
When recording purchases related to items you sell, always use purchase transaction types and product/service items. This will help you maintain clean, accurate data and generate reports that reflect your business’s true financial picture.
Stay tuned for future blogs, where we’ll dive deeper into accounts payable, advanced purchase practices, and expense management strategies.
