I'm also a small business and I do use COGS also. It's important to understand how this works on your taxes. Basically, the cost of your inventory is deductible in the year you actually sell it. It does not matter in what year it was purchased. Here's the basics.
- Beginning of Year (BOY) Inventory - What *YOU* paid for the inventory in your physically possession on Jan 1 of the tax year. If this was your first year of business, then the BOY Inventory ***MUST*** be zero. No ifs, ands, or butts. Period.
- End of Year (EOY) Inventory - What "YOU" paid for the inventory in your physically possession on Dec 31 of the tax year.
- Cost of Goods Sold (COGS) - What *YOU* paid for the inventory you actually sold in the tax year. This amount is what is deductible from the taxable business income for the tax year being filed.
Note that your BOY inventory must *EXACTLY MATCH* the previous year's EOY inventory. If it does not, then you got some 'splainin' to do to the IRS. It won't be fun. This is why in the first year of business (or the first year your business starts dealing with inventory) the BOY balance has to be zero. That way it agrees with the prior year EOY balance of zero.
Since your business did not carry inventory the prior year or if your business did not exist in the prior year, there is no possible way on this green earth your business had "ANY" inventory that prior year. That's why for the first year of inventory the BOY has to be zero. Doesn't matter if you purchased that inventory 50 years ago either. Here's some examples:
BOY Inventory $0
EOY Inventory $5000
COGS $2000
The above indicates that on Jan 1 I had no inventory. I ended the year with $5000 of inventory on Dec 31 and during the year I sold $2000 of inventory. The total purchased during the year was $7000 of which I get to deduct $2000 for the inventory I sold in that tax year.
BOY Inventory $2000
EOY Inventory $1000
COGS $9000
The above indicates that on Jan 1 of the next tax year I had $2000 of inventory in my possession, and it exactly matches what I had in my possession on the last day of the previous tax year. I ended the year with $1000 of inventory in my possession having sold $9000 of inventory. Simple math indicates that during the year I had purchased and additional $8000 of inventory which was all sold along with an additional $1000 of inventory I had from the previous year.
