If you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise.
Accrual accounting for inventory is a method of accounting in which your cost of goods is tracked for each unit individually. The cost amount of the item is included in Cost of Goods Sold (an expense) only when the item is sold. Before the item is sold, the amount is treated as an asset, Inventory.
This method matches revenues generated from the sale of goods with the costs of those goods.
The formula for calculating Cost of Goods Sold is:
Beginning Inventory + Purchases (For Resale) - Ending Inventory
There are various ways to maintain inventory records. If you do not have a lot of inventory, you may keep track the item, cost and sale date on something as simple as an spreadsheet. If you have many items you may want to look at purchasing some type of inventory management software.
When you file your taxes each year, the retail amounts will be reported as income, the Cost of Goods sold will be reported as the expense and the result will be the net profit.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
