When starting a business that caries inventory that is intended for resell, and you are going to use COGS for tracking that inventory, the BOY Inventory balance in the first year *must* be zero. It doesn't matter if you purchased that inventory 50 years ago either.
Many folks have a hard time wrapping their head around how COGS works. But once you "get it", it's like riding a bike.
Beginning of Year (BOY) Inventory balance - What *you* paid for the inventory in your physical possession on Jan 1 of the tax year. This value must match the EOY Inventory balance from the previous year. There are no exceptions to this. So if this was your first year dealing with inventory, your BOY Inventory balance must be zero. it does not matter in what tax year that inventory was purchased. No exceptions.
Cost of Goods Sold (COGS) - What *you* paid for the inventory you actually sold during the tax year. In what year you paid for it doesn't matter.
End of Year (EOY) Inventory balance - What *you* paid for the inventory in your physical possession on Dec 31 of the tax year.
Here's examples of the first two years.
Year 1:
BOY Inventory balance $0
COGS - $5000
EOY Inventory balance $2000
The above shows that I started the year with no inventory. That's because my business flat out did not exist on Jan 1 of the tax year. During the year my business obtained $7000 of inventory (when I obtained it, is irrelevant). I sold $5000 of that inventory leaving me with an EOY Balance of $2000. The $5000 of inventory that I sold will be deducted from my gross business income for the year, so I don't pay taxes on it.
Year 2:
BOY Inventory balance $2000 - Take note that this matches my prior year's EOY balance. If it doesn't, then I've got some 'splainin' to do to the IRS when they audit me, and there is no reason the IRS will accept for any difference.
COGS - $1000 - What "you" paid for the inventory sold in the tax year. What year I paid for it doesn't matter.
EOY Inventory balance $9000 - What *you* paid for the inventory in your physical possession on Dec 31 of the tax year.
The above shows that I started my 2nd year of business with $2000 in inventory. During the year I purchased an additional $8000 of inventory bringing my yearly inventory total to $10,000. Of that, I sold $1000 of inventory leaving me with $9000 of inventory in my physical possession on Dec 31 of the tax year.
