Cost of goods sold refers to calculating the value of a company’s inventory, which has already been sold, and the ones remaining to be sold. The cost of goods sold also involves your capital for producing products and delivering them to the customers. To calculate the costs of the goods, you must value your company’s equipment at the beginning and end of the year.
Companies must track the costs directly or indirectly included in producing and distributing the products for sale. These costs are known as the cost of goods sold (COGS), and this anticipation appears in the company’s profit and loss statement (P&L). It is also an essential part of the data that the company report on its tax return.
COGS are subtracted from your gross receipts to make out the gross profit from your business each year. Gross receipts refer to the amount your business receives from the sales each year. Therefore, the higher you can lawfully make the cost of goods sold, the lesser amount you’ll have to spend on taxes. However, the procedure for calculation is the same for every business.
Information required calculating cost of goods sold:
The calculation of the cost of goods sold relies on the tax returns. It is essential for every business as it is an allowance reduction on taxes. If a business couldn’t add this value, their revenue will become higher, and they’ll be paying higher taxes.
To determine the COGS, a tax preparer requires the following information.
-
Valuation method:
You must be aware that the inventory is valued at cost, less than the actual cost or market value. If you apply the cash accounting method, you must value the inventory at actual cost. Examine with your tax counselor if you’ve modified your method of calculating quantities, costs, and valuations. Also, you must include the reasons for the modifications.
Additionally, the mechanism of the valuation method is quite complicated, and it is suggested to hire a tax preparer to conduct this part of this calculation and perhaps review everything when you’re done.
-
Beginning inventory:
It refers to the entire cost of all the products in your inventory at the start of the year. The amount must be similar to the inventory at the end of the last year. If the amount is conflicting, you must explain the difference in your tax return.
-
Cost of purchases:
Next, calculate all the purchases you made during the year and place them with the sale inventory. Reduce any equipment you took out for personal use. If you’re crafting the products, you’re obliged to include the entire cost of the raw materials you bought for the production.
-
Labor wages:
It refers to the cost of the workforce who works to build finished products out of raw materials. They are considered distinct costs rather than being involved with the administrators and marketing staff.
Taxes and Cost of goods sold:
Practically, the cost of goods sold is a tax reporting requirement. Companies that produce and sell their commodities need to determine COGS to subtract the expenses. According to IRS, this activity diminishes the amount of tax they have to pay. Small businesses usually apply this method as they have to keep their tax amounts as low as possible.
For this purpose, a business must figure out the worth of its inventory at the beginning and the end of each tax year. At the end of the year, the value is subtracted from the beginning value to determine the cost of goods sold.
A higher cost of goods sold means that a company has to pay a lower tax amount, which also refers to less profitability ratio. However, the cost of goods sold must decrease to improve the profit ratio.
The cost of goods sold is a significant line element on an income statement. It determines the cost of producing a product or service for sale purposes. The IRS permits COGS to be included in tax returns and can lessen your business’s taxable income. Whether you’re an online retailer or a conventional retailer, the same rule applies everywhere.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
