The basics are these: Items are not an accounting concept. They are specific to QuickBooks.
Items are, in effect, a shortcut to entering sales-related transactions consistently, and a way to summarize and report your company financial information in different detail than you can with your Chart of Accounts.
Most importantly, QuickBooks Items are by far the best tool for getting Job Costing right, so it's worth your time learning about them, and considering how they might work best for your construction company.
Certain transactions in QuickBooks require Items, and in some they are optional. You can't create an Invoice or Sales Receipt without Items, nor an Estimate.
You also need them for a Purchase Order, and here is the first clue to how you should set them up for your construction contracting business to do Job-Costing.
The key to Job Costing with QuickBooks is to use “2-sided” Items and map the “expense” side to Cost of Goods Sold account(s).
If you have more than one Income account you will need at least one Item for each, because there is no way to Invoice without using an Item.
To do Job Costing right with QuickBooks, you should use Items for all Job-Related expenditures (Bills, Timesheets and Paychecks, and customer Invoices—even if you don't send them out). On job-related Bills, Checks, and Credit Card transactions, always use the Items tab, and always select the Customer:Job with each of these job-related transactions.
Although some people do, I never use the Items tab for non-job-related (overhead) transactions. I just think it’s easier to keep Job Costs and Overhead separate in every way I can.
The point is to use the two-sided Items and Cost of Goods Sold accounts for Job Costs. Then your P&L will look like this:
Income
less
Cost of Goods Sold
equals
Gross Profit
less
(Overhead) Expenses
equals
Net Profit
That’s Job Costing. Also, now you can look at all the Sales and Job-Related reports in QB and get meaningful information from them.
Be sure to review Disclaimers before employing this or any other QB Contractor Tip.
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