JAYE’S BOOKKEEPING TIPS #9

If you have a business, which requires an inventory of products, you already know you are an accrual business. But you also have to keep the records of the inventory. How to do this? Yes, more records to keep...


An accrual business enters the cost of the inventory when the order is placed. Here’s an example of your entry.
Dr Cr

Inventory $500.00
Accounts Payable ($500.00)

When you write the check:

Accounts Payable $500.00
Cash in Bank ($500.00)

What happens when you take the item out of inventory and sell it? Some people keep a separate record for each sale. If you sold the above for $750.00 and received payment at the time of the sale, your entries are:

Income – Sale ($750.00)
Cash in Bank $750.00

Cost of Goods Sold $500.00
Inventory ($500.00)

Others do not do this on a per sale business. You can count your inventory at the end of every month (at the price you paid for each item) and adjust through COGS (Cost of Goods Sold). Since you are not writing a check or entering an invoice, this is a Journal Entry (JE).

JE#1 Inventory ($500.00)
COGS $500.00

To record COGS for the month of January based on actual count.

That last “to record..” part is the explanation of what you are doing. Every JE requires an explanation.

Or you can estimate your COGS. If you mark your products up by adding 50% of the cost to the sale price, then make the above JE using the estimate cost and change the explanation as follows:

To record estimated COGS based on 50% markup.

At the end of the year, you have to count the inventory and made the adjustment to the actual amount; this will either increase your COGS or decrease it. Your taxman will want the following information.

Beginning Inventory
Purchases
Inventory Freight Costs
Ending Inventory

Jaye

jaye@strateshooter.com