I'm confused about "Cost of Goods Sold." How is it calculated?

[Traveling-Engineer]

 I can transfer inventory at the end of last year to inventory at the beginning of this year.  I didn't buy anything (business stagnant), so there were no purchases.  There was no labor, but there were finance charges since I bought product on credit cards during previous years.  Does that cost go here?  (Accountant did not do this.)

And then how do I know what current inventory is?  I sold some product, so do I go back and find out my original cost for what I sold and deduct that?

Am I supposed to have a record of all my inventory in QuickBooks?  (I'm trying to take over from the accountant.)

[Carl]

COGS can be confusing - especially if one over thinks it. I'll do my best to help you understand. Basically, when you purchase inventory, you can not deduct what *you* paid for that inventory, until the tax year you sell that inventory. Period. Also, the End of Year (EOY) inventory balance must match the next year's Beginning of Year (BOY) inventory. If it doesn't, then you must explain to the IRS why it does not. So here's a few examples, followed by explanations.

BOY Inventory: $5000

Cost of Goods Sold $1000 (What *YOU* paid for the inventory)

EOY Inventory $4000

The above indicates that I sold $1000 worth of my inventory in the tax year. The $1000 is what "I" paid for the inventory, it is NOT what I sold it for. Note that it flat out does not matter in what year I purchased that inventory either. I could have purchased it 10 years ago. But I can only deduct from the current tax year's income, the cost of what I actually sold in that tax year.

BOY Inventory $5000

Cost of Goods Sold $1000

EOY Inventory: $9000

The above indicates that I started the year with $5000 in inventory. It also shows that I sold $1000 of that inventory, and in that same tax year I purchased an additional $5000 of inventory leaving me a total of $9000 of inventory left at the end of the year.

[rolandfoss]

Carl, Inventory is an asset, at least in my accounting (QuickBooks). Inventory is not a P&L item, yet in Turbo Tax they insist it is.  So I'm running into problems where my COGS is not matching up b/w QB and TT because my Inventory EoY is much lower than BoY and therefore TT is showing a higher COGS than QB is.   Basically, I"m not understanding why you're conflating Inventory levels with COGS.  Since Inventory is by definition unsold, the level of Inventory, or amount of change, doesn't affect the cost of the items that were sold.

[Carl]

I'm not going to go tit-for-tat on this. I've been self-employed using both QB and TTX for over 15 years now and know how it works, as well as how the QB program is *supposed* to integrate with TTX. I've explained it above, and if you can't understand it I just don't know how to explain it any clearer. Maybe someone else can jump in here.

[rolandfoss]

I would suggest that the answer to the original question should be simpler: Yes, you need to figure out the cost for the inventory that you sold during the tax year. Period.  What confused me about your answer is why you would bring in inventory into the picture. As you said, "But I can only deduct from the current tax year's income, the cost of what I actually sold in that tax year."  COGS is as simple as that.  The questioner has only one calculation to make: "How much did I pay for the items I sold last year." Am I missing something?  The reason why I came to this answer, is because I had a question of why TT includes Inventory beginning and end in its COGS step-by-step calculation.  For example, at start of 2017 I had Inventory of $18,000, at end I had $11,000.  I had COGS of $336,000.  That $7,000 in vanishing inventory is already included in my COGS. Yet TT added $7,000 to my COGS, making it $343k.  To correct that (and maintain fidelity with QB), I just zeroed out beginning and ending Inventory.  This is my first year with TT (always used a CPA), so I'll need to watch out to make sure this causes no issues with my Balance Sheet.