Costs of Goods Sold vs. Inventory: Where Does it fit?

The term cost of goods sold can mean a lot of different things, depending on what type of business you are in. If you are in a retail business, the definition is fairly clear cut. The cost of goods sold equals  your purchase costs on the items you have sold during a given period. If you sold ten candles at $10 each, then your revenue from sales is $100. If those 10 candles cost you $4 a piece when you purchased them, then your cost of goods sold is $40 for those 10 candles.

However, you probably purchased those 10 candles several months before they were sold. Where do you record that $40 purchase initially? Your purchases of goods for sale should initially be debited to your inventory account, which is an asset account on your balance sheet. You have simply exchanged one asset (cash ) for another asset (inventory).
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Purchases of Items Used in Business: Where Does it Fit?

When it comes to asset related transactions, cash and accounts receivable transactions are pretty self-explanatory and also the most commonly recorded. It is the inventory and fixed asset transactions that can be confusing at times.  We will focus on the purchase of office related items in this article.
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Chart of Accounts: Where Does It Fit?

Sometimes it can be confusing as to where an item should be recording in your lists of accounts. This is especially true if it is a transaction that you have never recorded before. Understanding how your chart of accounts is organized can make it easier to determine which accounts you should use for each new transaction.

This is a basic organizational layout of any chart of accounts, and the types of items entered under each category:

Balance Sheet Accounts:

Assets

• Current Assets -Cash accounts, Accounts Receivable and Inventory
• Fixed Assets – Items that will depreciated over a period of years. Vehicles, furniture, equipment, buildings and real estate.

Liabilities

• Current Liabilities – Accounts payable and any portions of debt that will be paid within the current year.
• Long term Liabilities – Mortgages and other long term debts.

Owner’s Equity

• Owner’s Contributions – Initial startup costs and other contributions
• Retained Earnings – Accumulated profits and/or losses

Income Statement Accounts:

Operating Revenue – Gross sales

• Cost of Goods Sold – Direct costs of sales: purchases, labor for services, materials, subcontracted labor

Operating Expenses – Administrative salaries, office expense, rent, utilities, insurance etc
Non-operating Revenue – Sales of assets, refunds
Non-operating Expenses – Penalties, fines etc.

This, of course, is still a very broad overview. Be watching for more detailed explanations of these accounts in our future blog posts.

1099 Vendor Setup in Quickbooks

In addition to selecting all your appropriate accounts under the 1099 setup preferences, discussed in our previous post, you will need to set up your 1099 vendors properly as well. Under each vendor’s setup there is an Additional Info tab. On this tab, you will find a check box labeled “Vendor eligible for 1099”. Right above this check box is a field for entering the vendor’s tax ID number. For every vendor who provides services for you, and is not incorporated, you should have the 1099 box checked and their tax ID number recorded. This includes vendors whom you haven’t paid, or don’t expect to pay, $600.00 or more. It will also be important to have their mailing address in your vendor setup for 1099 purposes as well.
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1099 Settings in Quickbooks

If you hire services performed by other individuals or companies during the year, you may be required to supply them with a 1099 form at the end of the year, showing the full amount of funds distributed to them for their services. Corporations and vendors whose total payments for the year totaled less than $600.00 do not need to receive 1099 forms, but the rest of those vendors will. In order to print out accurate forms at the end of the year from your Quickbooks software, you will need to make sure that you have your 1099 settings in Quickbooks set appropriately.

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