Every retail business has an unsold inventory that collects over time. In practice, retail functions by selling products, but no retail business operates at 100% efficiency and sells out everything in the inventory. Little do we know that unsold inventory can directly affect the amount you pay for taxes. To put it simply, your taxes depend on how much profit you generate during the year. And the profit you make is a function of inventory purchased and sold out. Hence, inventory has a direct impact on the tax you’d pay. In this article, we have broken down all the details you need to know.
Inventory Value- The Retail Method
Every retail business should value inventory at the end of the year. Here’s how to use the retail method of valuing inventory: multiply the unsold inventory with average markup percentage. The retail method of valuing inventory works if you have a consistent markup percentage. Once you have figured out inventory value at the end of the year, subtract the value from the total inventory you have purchased during the year. This gives you the cost of goods sold. Evaluating this is an essential step towards computing your taxes.
Inventory and Profits
Your sales make your total revenue. The cost of goods sold is subtracted from total revenue to figure out profit. The taxes you pay are based on this profit. How you will report your profit depends on the kind of business you run and the structure you follow. The corporate structure you follow is based on how your assets are protected.
Inventory and Tax
The value of your inventory depends on its purchase cost. Worthless items must not be counted as inventory. The higher the cost of goods sold, the more deductions are made from your total sales revenue, lower your profit and the tax that you will have to pay.
You get no tax advantage in keeping an inventory that is not needed for running a business. Inventory purchases are not deducted from tax until the inventory becomes useless, is sold, or is removed. On the other hand, keeping less than necessary inventory does not help in reducing your taxes. Some companies use “just in time inventory” method to conserve cash. By trying to time the inventory with the production process, some companies can save some money and avoid excess facility costs.
Get your sheets right. Record everything
The significance of creating sheets is evident because it produces accountability. The primary purpose of any business is to earn profits. A measurable way for businesses to regulate the financial and economic profitability of an investment project is the capital budgeting process and keeping their records straight. The processes involved in the capital budgeting process are:
- To develop and formulate strategic goals.
- To find out innovative investment projects.
- To evaluate and forecast future cash flows.
- To facilitate the transfer of information.
- To Monitor and Control the Expenditures
- To make a decision
A balance sheet is used to account for the financial position such as liabilities, amount of assets, and the stockholders’ equity of an accounting unit at a specific point in time.
The income statement can be explained by the statement of the earnings, statement of the income, or statement of the procedures. It pertains to the accountant’s key evaluation of the progress of a business, proceeds fewer costs throughout the accounting time.
The statement of cash flows splits cash inflows and outflows (receipts and payments) into three basic groups of cash flows in a business- cash flows from investing, operating, and financing events. The name of the entity, the title of the report, and the unit of measure used in the statement is classified through the heading. This statement is similar to the income statement; it includes a particular period that is the accounting period.
Consult a Specialist
Consult a specialist who can guide you in the best way you can reduce paying additional taxes. A consultant will help you decide the right method for organizing assets and managing inventory.
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