I just stumbled on to your video. I am very impressed on how you presented and explained this difficult topic that small business owners have a hard time understanding. Well done!
I know this is over 2 years later, but first, thanks for the very informative content. Second, I do have a question about how you deal with the products created with the inventory categorized as COGS. I'll use an example since it's more clear. I'm making cakes. I purchase 50 lbs of flour, sugar, butter, etc.. and expense it all to the COGS G/L. The finished product - do you need to create inventory of that in your accounting system at all, or just record the sales when they happen? Following your method, at the end of the year, my ACTUAL COGS for tax purposes would be the depletion of these items, which is why I have to adjust per actual inventory. But not ALL of that depleted raw material was actually sold. Some of it is now unsold cakes. Do I have to record unsold assembled product as inventory ? Or just leave inventory out of the equation altogether as far as Quickbooks is concerned, and just record sales of "baked goods" revenue without quantities/inventory? Sorry if this is long winded...!
You are really thinking things through! FYI, since the creation of the video, the IRS requirement for an end of year inventory count has changed slightly. Most tax preparers are now saying that small business owners on the cash basis of accounting (what I am using and recommending in all my videos) do not need to do an end of year inventory count or determine their actual COGS at year-end. Everything can stay as an expense. So I would keep doing what you are doing, record all raw materials to COGS. If your tax preparer makes you do an end of inventory count, I wouldn't worry about the value of product in cakes made but not sold. That's just a bit more specific than necessary for a small business owner. If you were a huge cake corporation, then yes, you would have to worry about all that. But I think you are safe to keep it simple!
Hi Sarah! Thank you so much, I keep watching your videos again and again. I want to clarify something if you can help me: So, does this method (cash basis) mean that we don't have to do anything to our record, if inventory is returned damaged/unsellable condition? We should act like it's in COGS. Also, how about reimbursements by Amazon. Do we need to do anything different for those inventories?
Yes, if inventory is returned/damaged/unsellable, there's nothing you would need to do. You have already incurred the expense when you bought the them. I'm not sure what you mean by reimbursement by Amazon. Can you explain more?
Great video! It is my first year selling on Amazon and your videos have been extremely helpful. Can you explain how to do end of year inventory and how we can include it in quickbooks? Thanks!
There is an inventory management report you can run showing end of year inventory with Amazon. Then your entry would be to Debit Inventory Asset for the value of inventory on hand at year end and Credit Cost of goods Sold (to reduce COGS by the amount of inventory on hand).
Hey Sarah, thanks for the informative videos. I downloaded your COA, but I don't see the COGS category. I'm starting from scratch using Bkper for Google so I'm not sure if you meant to leave it out because QuickBooks automatically adds it or if you intended COGS to be under this one in your COA --> "Amazon Selling Expenses --> Expenses --> Office/General Administrative Expenses"
Hi Kristin, Yes QB usually does include the Cost of Goods Sold account automatically. No, I would not put COGS under the Amazon Selling Expenses or Office Expenses. Cost of Goods Sold is a special type of expense account that is shown after Income, and not grouped with the other Expenses. Hopefully you can find an option like that in your program!
Hi Sarah i love you video. So for candle business all container and packing label are included in the cost of qoods sold or just the material that goes into the containers?
I would include in COGS - the wax, the wick, the jar, labels on the actual jar. Any packaging materials and labels used for shipping I would categorize to a Shipping Supplies expense account.
Hi Sarah, great content thank you! I'm not clear how categorizing to COGS negates the need to count the inventory as an asset. Hopefully that's a simple explanation :)
Hi Travis, there are two basis of accounting cash and accrual. Cash is easier and more widely used by small business owners. With the Cash basis of accounting, purchases of inventory are categorized as an expense, COGS. With the accrual basis of accounting, purchases of inventory would be categorized as an asset. The purchase of raw materials must be categorized in one of these two ways, but not both ways. Does that help?
@@SmallBusinessSarah To piggy back off of this question, if using the cash method, how can I account for inventory returned or damaged (loss, not reimbursed) in qb.
If you are recording all raw materials/items for resale purchases directly to COGS, then, you are already accounting for the expense of items that are later damaged. Nothing else for you to do. I just answered another question for a subscriber that has some details you might find helpful too. I literally just replied to that one as you were typing!
Hi Sarah, thank you so much for your videos! I have one question, what will happen to the balance sheet if the inventory is recorded in COGS? Will it be skewed as well? If so, how can the data be corrected over time? Like the looking at PnL Quarterly in your example gives better view of the data because the monthly with October's data was ugly.
So when everything is recorded to COGS, there will not be an inventory value on the Balance Sheet. And as discussed this can skew things when looking at a small period, but over a longer period time it evens out a bit. That being said, this method isn't right for everyone, but it often is a good option for handmade and online sellers. If you are a big manufacturer, wholesaler, or retailer, then this method would not be a good fit. If you like the ease of this method, but would like to see your inventory on the Balance Sheet, one option would be to record a monthly journal entry to adjust the Inventory balance to a reasonable estimate of the value on hand. This would be a quick and simple solution to get the best of both worlds.
Yes, at the end of the year, do an inventory count and get an estimated value of inventory at year-end. Beginning value would be zero if you didn't have one previously, then just enter in the values on the Schedule C, and your tax value of COGS will be calculated. I do want to point out that there has been some new tax code guidance in regard to small businesses and inventory. Many tax preparers now feel that even the ending inventory count is no longer necessary for small businesses, and all inventory purchases can be cost of goods sold. As with all things IRS, it's not super straightforward, so just talk to your tax preparer. But you can't go wrong with an ending inventory count.
Hi Sarah, thank you for making available this great content. In this video you describe how to categorize inventory under cogs. If I purchase from multiple suppliers, do you recommend I create subcategories under cogs for each supplier? Thanks.
No, I don't recommend that. I do recommend you add Vendors when you categorize, and then you can run vendor reports later if you want. If you want to add large COGS categories by what you purchase, that could make sense. For example, COGS -widget A, COGS-widget B, as opposed to COGS-Amazon, COGS-Best Buy.
I believe the threshold is now under 25 million correct? Also.... I was told by several cpas recently that even inventory expenses can be expensed in same year of purchase now if you are under 25 million rather than as items sell. Something about rule allowing for inventory to be tracked the save and consistent with your other accounting methods (cash vs accrual). What are your thoughts on this? Is this what you have understood now as well?
Thanks for the videos Sarah! They are very helpful to me. As mentioned, can you tell us what we need to do to the COGS account at the end of the year? Do you just do a journal adjusting entry against COGS? Thank you!
Honestly you don't have to adjust the COGS. You will need ending inventory for taxes, but you don't have to adjust your books. If you want to adjust your books, then record a journal entry to Debit Inventory Asset and Credit COGS.
@@SmallBusinessSarah Hi! Thank you for the video, it's very helpful. When doing the journal entry to account for inventory at the end of the year, is the value at cost, or retail?
Hi Sarah, thank you so much for this video! It answered so many questions for me and I think put me on the right track! One question I have is as I make sales do I adjust the COGS or can I just calculate my COGS at the end of the year based on the difference of my raw materials at the beginning of the year and my raw materials at the end of the year? If the latter, should I make an adjustment to COGS to reflect the difference and to more accurately reflect COGS in QBO?
Hi Marcus, I would not adjust on a per sale basis, it will take too much time. You can adjust monthly or yearly after counting your raw materials on hand if you like. I find the Schedule C easier to complete if I don't adjust my bookkeeping records, but that is up to you. If it helps you to adjust inventory and COGS at year-end, go for it!
Hi Sarah, thank you so much for your knowledge and your videos. I have a question and I hope you can help me answer. I am an individual US seller living and selling on amazon abroad, I don't have a company and am selling as an individual, can I give myself a salary as a self-employed and consider it as an expense?
Hi Iman, I'm not sure how where you live will affect your taxes. If you also lived in the U.S. and were a sole proprietor then you would just transfer money from your business bank account to your personal account. On the bookkeeping end of things, this would be categorized as Owner's Pay, an Owner's Equity account type, not an expense. But like I said, I don't know how your situation might affect your taxes.
Hi Sarah, When I use the recording directly to cogs on my bank record, it double records as accounts payable and cogs which affects the balance. I can't seem to get solution for this anywhere. Can you help?
There is nothing extra you need to do. The cost of any list product was already captured when you purchased the products. There is no additional cost to add. If you want to separate out those costs you would Debit a Lost or Damaged Products expense account and Credit COGS, but this would have no change to your net income.
Ive been researching to try to figure out how to do taxes for sewing dolls clothes. In the Cash Method I thought if everything was counted as COGS then inventory ending would count as 0 for ending the year and then making it 0 for start of new year. Is this not correct. I just want the very simplist method. Im just trying to make a little extra a month to survive retirement, not to make a big business. I keep putting off starting business because i cant figure out the taxes. Cant afford accountant.
You are correct, that with the Cash basis ending inventory and beginning inventory would be zero. However, in this video, I'm talking about how in the past the IRS still wanted Cash basis small business owners to still count their inventory at year-end. This has changed a bit in recent years, and now the general consensus that Cash basis small business owners do not need to count their inventory for tax purposes. Don't let bookkeeping/taxes prevent you from starting your business!
Hi. Thank you for the informative video. Do you have any recommendations for a small Etsy seller - I have a woodworking business that I have many small items listed for sale, but I only make them once the item is ordered. So at year end, I will not have any items in inventory. My main expense is wood purchases. So at year end, I will have some wood left over. Can I count this wood expense in the year I purchased the it, even though I will not use it to make products until the next calendar year? Thanks!
Hi Kelly, as you buy the wood, categorize it directly to COGS. At the end of the year you should somehow measure the quantity of wood you have on hand, and assign a value to it. You will need that figure for your Schedule C, page 2. There is a little calculation there, that adjust your COGS figure for your inventory you have on hand at year end.
Respected sir . We purchase used bottles as Raw materials. And make them pet flakes. As a finished product. We buy raw materials in kg And sell in kg Every time we buy at a different price depends on the market situation. (Same RM) And when we sell finished products with different rates to different parties. So I want to track my finished product availability for sale. For more manufacturing. Means I want to track how much finished product we sell or how much is still available for sale. (In kg) No need to track raw materials WIP etc. But whenever we purchase raw materials we must hit the vendor supplier account as an account payable. And When we sell the finished product we have to hit the customer account receivable . Please need your help for the sake of God. Using QuickBooks enterprise
End of year inventory value will be the amount you paid to acquire the raw materials you have on hand at year -end. So it's the cost of the raw materials, not the quantity or retail value.
Thanks for the video. Isn't the revenue limit 26 million; not 1 million? per IRS: Small business taxpayer. You qualify as a small business taxpayer if you: Have average annual gross receipts of $26 million or less (indexed for inflation) for the 3 prior tax years, and
Would you consider making a video explaining how to set up all the categories and sub accounts ? Also, how adding a journal entry AND categorizing expenses go hand-in-hand?
Sarah, thanks for the great content. I am an Amazon seller. Do you know of a report that tells you your monthly inventory movement and one that tells you the ending inventory to do the year end inventory for tax purposes? Thanks.
I just stumbled on to your video. I am very impressed on how you presented and explained this difficult topic that small business owners have a hard time understanding. Well done!
Thanks!
You are fantastic!! Thank you for all of your content! This video was a huge help!!!!
You are a superwoman. The best video series on YT thus far on QB & eCommerce. Thank you.
I know this is over 2 years later, but first, thanks for the very informative content. Second, I do have a question about how you deal with the products created with the inventory categorized as COGS. I'll use an example since it's more clear. I'm making cakes. I purchase 50 lbs of flour, sugar, butter, etc.. and expense it all to the COGS G/L. The finished product - do you need to create inventory of that in your accounting system at all, or just record the sales when they happen? Following your method, at the end of the year, my ACTUAL COGS for tax purposes would be the depletion of these items, which is why I have to adjust per actual inventory. But not ALL of that depleted raw material was actually sold. Some of it is now unsold cakes. Do I have to record unsold assembled product as inventory ? Or just leave inventory out of the equation altogether as far as Quickbooks is concerned, and just record sales of "baked goods" revenue without quantities/inventory? Sorry if this is long winded...!
You are really thinking things through! FYI, since the creation of the video, the IRS requirement for an end of year inventory count has changed slightly. Most tax preparers are now saying that small business owners on the cash basis of accounting (what I am using and recommending in all my videos) do not need to do an end of year inventory count or determine their actual COGS at year-end. Everything can stay as an expense. So I would keep doing what you are doing, record all raw materials to COGS. If your tax preparer makes you do an end of inventory count, I wouldn't worry about the value of product in cakes made but not sold. That's just a bit more specific than necessary for a small business owner. If you were a huge cake corporation, then yes, you would have to worry about all that. But I think you are safe to keep it simple!
That was a very helpful video, thank you.
Glad it was helpful!
Hi Sarah! Thank you so much, I keep watching your videos again and again.
I want to clarify something if you can help me:
So, does this method (cash basis) mean that we don't have to do anything to our record, if inventory is returned damaged/unsellable condition? We should act like it's in COGS.
Also, how about reimbursements by Amazon. Do we need to do anything different for those inventories?
Yes, if inventory is returned/damaged/unsellable, there's nothing you would need to do. You have already incurred the expense when you bought the them. I'm not sure what you mean by reimbursement by Amazon. Can you explain more?
Great video! It is my first year selling on Amazon and your videos have been extremely helpful. Can you explain how to do end of year inventory and how we can include it in quickbooks? Thanks!
There is an inventory management report you can run showing end of year inventory with Amazon. Then your entry would be to Debit Inventory Asset for the value of inventory on hand at year end and Credit Cost of goods Sold (to reduce COGS by the amount of inventory on hand).
@@SmallBusinessSarah Thanks for the response! Can you do a quick video on this? It seems like other people have the same question as I do.
Hey Sarah, thanks for the informative videos. I downloaded your COA, but I don't see the COGS category. I'm starting from scratch using Bkper for Google so I'm not sure if you meant to leave it out because QuickBooks automatically adds it or if you intended COGS to be under this one in your COA --> "Amazon Selling Expenses --> Expenses --> Office/General Administrative Expenses"
Hi Kristin, Yes QB usually does include the Cost of Goods Sold account automatically. No, I would not put COGS under the Amazon Selling Expenses or Office Expenses. Cost of Goods Sold is a special type of expense account that is shown after Income, and not grouped with the other Expenses. Hopefully you can find an option like that in your program!
Hi Sarah i love you video. So for candle business all container and packing label are included in the cost of qoods sold or just the material that goes into the containers?
I would include in COGS - the wax, the wick, the jar, labels on the actual jar. Any packaging materials and labels used for shipping I would categorize to a Shipping Supplies expense account.
Hi Sarah, great content thank you! I'm not clear how categorizing to COGS negates the need to count the inventory as an asset. Hopefully that's a simple explanation :)
Hi Travis, there are two basis of accounting cash and accrual. Cash is easier and more widely used by small business owners. With the Cash basis of accounting, purchases of inventory are categorized as an expense, COGS. With the accrual basis of accounting, purchases of inventory would be categorized as an asset. The purchase of raw materials must be categorized in one of these two ways, but not both ways. Does that help?
@@SmallBusinessSarah To piggy back off of this question, if using the cash method, how can I account for inventory returned or damaged (loss, not reimbursed) in qb.
Hi Sarah, your videos have been so helpful, thank you! I am wondering how to deduct for COG items that were damaged/unsellable?
If you are recording all raw materials/items for resale purchases directly to COGS, then, you are already accounting for the expense of items that are later damaged. Nothing else for you to do. I just answered another question for a subscriber that has some details you might find helpful too. I literally just replied to that one as you were typing!
Hi Sarah, thank you so much for your videos! I have one question, what will happen to the balance sheet if the inventory is recorded in COGS? Will it be skewed as well? If so, how can the data be corrected over time? Like the looking at PnL Quarterly in your example gives better view of the data because the monthly with October's data was ugly.
So when everything is recorded to COGS, there will not be an inventory value on the Balance Sheet. And as discussed this can skew things when looking at a small period, but over a longer period time it evens out a bit. That being said, this method isn't right for everyone, but it often is a good option for handmade and online sellers. If you are a big manufacturer, wholesaler, or retailer, then this method would not be a good fit. If you like the ease of this method, but would like to see your inventory on the Balance Sheet, one option would be to record a monthly journal entry to adjust the Inventory balance to a reasonable estimate of the value on hand. This would be a quick and simple solution to get the best of both worlds.
i plan on making items,as I get orders. I dont want products sitiing on the shelf. I am using separate sheets of paper for supplies..etc,for now
Same advice as in the video, just categorize purchases of materials you are using to create your items directly to cost of goods sold.
Great method Sarah. So when doing taxes at the year-end would you report all three values, COGS, opening inventory, and closing inventory?
Yes, at the end of the year, do an inventory count and get an estimated value of inventory at year-end. Beginning value would be zero if you didn't have one previously, then just enter in the values on the Schedule C, and your tax value of COGS will be calculated. I do want to point out that there has been some new tax code guidance in regard to small businesses and inventory. Many tax preparers now feel that even the ending inventory count is no longer necessary for small businesses, and all inventory purchases can be cost of goods sold. As with all things IRS, it's not super straightforward, so just talk to your tax preparer. But you can't go wrong with an ending inventory count.
Hi Sarah, thank you for making available this great content. In this video you describe how to categorize inventory under cogs. If I purchase from multiple suppliers, do you recommend I create subcategories under cogs for each supplier? Thanks.
No, I don't recommend that. I do recommend you add Vendors when you categorize, and then you can run vendor reports later if you want. If you want to add large COGS categories by what you purchase, that could make sense. For example, COGS -widget A, COGS-widget B, as opposed to COGS-Amazon, COGS-Best Buy.
I believe the threshold is now under 25 million correct? Also.... I was told by several cpas recently that even inventory expenses can be expensed in same year of purchase now if you are under 25 million rather than as items sell. Something about rule allowing for inventory to be tracked the save and consistent with your other accounting methods (cash vs accrual). What are your thoughts on this? Is this what you have understood now as well?
You are right, the IRS recently made some clarifications. I found this article helpful: notyourdadscpa.com/can-i-deduct-inventory-when-i-purchase-it/
Thanks for the videos Sarah! They are very helpful to me. As mentioned, can you tell us what we need to do to the COGS account at the end of the year? Do you just do a journal adjusting entry against COGS? Thank you!
Honestly you don't have to adjust the COGS. You will need ending inventory for taxes, but you don't have to adjust your books. If you want to adjust your books, then record a journal entry to Debit Inventory Asset and Credit COGS.
@@SmallBusinessSarah Hi! Thank you for the video, it's very helpful. When doing the journal entry to account for inventory at the end of the year, is the value at cost, or retail?
@@lindseyjohnson6032 Cost.
Hi Sarah, thank you so much for this video! It answered so many questions for me and I think put me on the right track! One question I have is as I make sales do I adjust the COGS or can I just calculate my COGS at the end of the year based on the difference of my raw materials at the beginning of the year and my raw materials at the end of the year? If the latter, should I make an adjustment to COGS to reflect the difference and to more accurately reflect COGS in QBO?
Hi Marcus, I would not adjust on a per sale basis, it will take too much time. You can adjust monthly or yearly after counting your raw materials on hand if you like. I find the Schedule C easier to complete if I don't adjust my bookkeeping records, but that is up to you. If it helps you to adjust inventory and COGS at year-end, go for it!
@@SmallBusinessSarah Thank you Sarah! Makes sense! You are an angel!
I really love your content and I am interested in learning to do my own bookkeeping. I am a new Amazon seller. Do you have a course or anything?
My course is basically all of my free videos! No official paid course.
Hi Sarah, thank you so much for your knowledge and your videos.
I have a question and I hope you can help me answer. I am an individual US seller living and selling on amazon abroad, I don't have a company and am selling as an individual, can I give myself a salary as a self-employed and consider it as an expense?
Hi Iman, I'm not sure how where you live will affect your taxes. If you also lived in the U.S. and were a sole proprietor then you would just transfer money from your business bank account to your personal account. On the bookkeeping end of things, this would be categorized as Owner's Pay, an Owner's Equity account type, not an expense. But like I said, I don't know how your situation might affect your taxes.
Hi Sarah,
When I use the recording directly to cogs on my bank record, it double records as accounts payable and cogs which affects the balance. I can't seem to get solution for this anywhere. Can you help?
Hmmmm. It sounds like you might be entering your bills also into QuickBooks. That's a step I don't take.
if using the cash method, how can I categorize the inventory returned or damaged (loss, not reimbursed) in qb
There is nothing extra you need to do. The cost of any list product was already captured when you purchased the products. There is no additional cost to add. If you want to separate out those costs you would Debit a Lost or Damaged Products expense account and Credit COGS, but this would have no change to your net income.
Ive been researching to try to figure out how to do taxes for sewing dolls clothes. In the Cash Method I thought if everything was counted as COGS then inventory ending would count as 0 for ending the year and then making it 0 for start of new year. Is this not correct. I just want the very simplist method. Im just trying to make a little extra a month to survive retirement, not to make a big business. I keep putting off starting business because i cant figure out the taxes. Cant afford accountant.
You are correct, that with the Cash basis ending inventory and beginning inventory would be zero. However, in this video, I'm talking about how in the past the IRS still wanted Cash basis small business owners to still count their inventory at year-end. This has changed a bit in recent years, and now the general consensus that Cash basis small business owners do not need to count their inventory for tax purposes. Don't let bookkeeping/taxes prevent you from starting your business!
Would you also categorize digital products that you purchase for resale (POD Seller) as Cost of Goods Sold?
Yes, anytime your POD vendor charges you for the items they are printing and shipping, categorize that to Cost of Goods Sold.
Hi. Thank you for the informative video. Do you have any recommendations for a small Etsy seller - I have a woodworking business that I have many small items listed for sale, but I only make them once the item is ordered. So at year end, I will not have any items in inventory. My main expense is wood purchases. So at year end, I will have some wood left over. Can I count this wood expense in the year I purchased the it, even though I will not use it to make products until the next calendar year? Thanks!
Hi Kelly, as you buy the wood, categorize it directly to COGS. At the end of the year you should somehow measure the quantity of wood you have on hand, and assign a value to it. You will need that figure for your Schedule C, page 2. There is a little calculation there, that adjust your COGS figure for your inventory you have on hand at year end.
Great videos! I’m a 3rd year eBay seller adding more and more Amazon sales to the mix. Do you offer monthly book keeping services as well?
I do, but I'm currently only adding people to a waiting list. I need to take a breather on new monthly clients!
Respected sir .
We purchase used bottles as Raw materials. And make them pet flakes. As a finished product.
We buy raw materials in kg
And sell in kg
Every time we buy at a different price depends on the market situation. (Same RM)
And when we sell finished products with different rates to different parties.
So
I want to track my finished product availability for sale. For more manufacturing.
Means I want to track how much finished product we sell or how much is still available for sale. (In kg)
No need to track raw materials WIP etc.
But whenever we purchase raw materials we must hit the vendor supplier account as an account payable.
And
When we sell the finished product we have to hit the customer account receivable .
Please need your help for the sake of God.
Using
QuickBooks enterprise
Did you really call her a "sir"?
I’m just a bit confused by the end of year inventory counts. Is this a value in the number of items or is it a dollar amount added up for each item?
End of year inventory value will be the amount you paid to acquire the raw materials you have on hand at year -end. So it's the cost of the raw materials, not the quantity or retail value.
Thanks for the video. Isn't the revenue limit 26 million; not 1 million?
per IRS:
Small business taxpayer. You qualify as a small business taxpayer if you:
Have average annual gross receipts of $26 million or less (indexed for inflation) for the 3 prior tax years, and
You are probably right.
Would you consider making a video explaining how to set up all the categories and sub accounts ? Also, how adding a journal entry AND categorizing expenses go hand-in-hand?
I do have a video on creating the chart of accounts for Amazon and Etsy. See your other comment for the other answer.
Sarah, thanks for the great content. I am an Amazon seller. Do you know of a report that tells you your monthly inventory movement and one that tells you the ending inventory to do the year end inventory for tax purposes? Thanks.
There is an inventory management report you can use for ending inventory purposes at year end, but I'm not sure how you find it.
What would it cost to have a one on one call with you for advice?
I'm sorry, I'm not offering one on one consultations at this time.
Meredith off of the The Office vibes😂
At least you didn't say Kevin.
Hi Sarah, are FIFO and Averaged Cost COGS forms of accrual accounting methods??
Yep. Those method of tracking inventory would be part of accrual based accounting.
Great video Sarah do you have a Facebook account so that I want to ask you
Ask any questions here!