Accounting for Cost of Goods Sold

[Beth Leonard]

On Sun, Jun 28, 2009 at 04:10:50PM -0700, John Jason Jordan wrote:
> Anyway, I'm not that bad off. I do understand COGS and how to do it.
> What had me flummoxed was that all the examples (and yes, textbooks
> that I consulted) assumed that I would have a precise cost per book.

I was complaining about just that very thing to a friend of mine
who is studying to be an accountant.  (I make DVDs.)  I was complaining
that I basically needed to use algebra to figure out what
number to put in the COGS line on my taxes -- for the DVD cases,
I bought a new batch of higher quality and price.  I'd used up some
of the old ones and some of the new ones and was figuring out price/each
including the shipping charges I paid.  I couldn't see how the
less-mathematically-inclined small business owner could possibly
do it.

Her answer is: they don't.  She said that she'd get fired if she
spent that much time auditing something like that down to the penny.
It wouldn't change my taxes by more than $17 either way if I assumed
"all" vs. "none" of the price paid for inventory went into COGS.

In the long run, don't worry too much about it.  That's difficult for
me because I'm the type who balances my checkbook to the penny.
I write down my consumable inventory (how many DVDs, cases, ink cartridges,
and paper) at the start of each year.  

When I buy more of something, I enter it as Expenses:Materials and
in the Description, I write out:
 1800 DVDs for $1125 including shipping = $0.625 each

On January 1st, I count out that I still have 1625 DVDs remaining.

For US tax purposes:
35. Inventory at beginning of the year = $0 (or whatever the end of last year was)
36. Purchases less cost of items withdrawn for personal use: 
	$1125 (the total in Gnucash's Expenses:Materials)
37. Cost of labor.  Do not include any amounts paid to yourself: $0
38. Materials and supplies: $0
39. Other costs: $288 (shipping costs, ask your accountant if anything
	else goes here for your business)
40. Add lines 35 through 39
41. Inventory at end of year: Here is where I go count what's left
	and multiply by the "per each" numbers I recorded in Gnucash
	when I bought the stuff.  1625x$0.625 in this example =$1016)
42. Cost of Goods Sold. Subtract line 41 from line 40.  Enter the result
	here and on page 1 line 4.


This totally avoids the question of what I did with the 8 DVD blanks
that were mis-burns, or I had to redo because I misspelled someone's
name, or whatever.  Don't worry about those, just throw them in the
trash but remember to count how much unused stuff you have on January 1st.
Also remember to calculate a "per each" when you buy something.

Those are the key parts from my perspective.

--Beth
Beth Leonard
http://www.LeonardFamilyVideos.com