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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Tags: Accounts Receivable, Accrual Basis, Asset Account, Asset Inventory, Balance Sheet, Candles, Cash Basis, Crediting, Different Things, Fit, Gross Profit, Income Statement, Inventory Account, Inventory Count, Lot, Material Purchases, Physical Inventory, Retail Business, Service Business, Year End

It’s Not Too Late to Budget for 2011

Did the end of 2010 creep up on you before you had time to create budgets for the new year approaching? Or maybe, you’ve never created an annual budget for your business before. Either way, it’s not too late to put together a budget for 2011.
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Tags: Budget Reports, Budgets, Creep, Decreases, Expense Accounts, Gauge, Gross Profit, Majors, Net Income, New Year, Office Supplies, Previous Years, Revenue Goals, Sync, Thermometer, Waste Of Time

Income Statement Breakdown (Part 4): Finding the Bottom Line

We’ve been taking apart the income statement to help you better understand it and so that you can find money-saving, profit-increasing opportunities inside of it. This is the fourth and final step in the process and here we are getting close to the bottom line!

So far we’ve…

• Looked at Revenues and came away with Net Sales
• Looked at Cost of Goods Sold (either accrual or cash-based) and came away with Gross Profit
• Looked at Operating Expenses and came away with Net Profit

But those are not the only people who have their hand in the cash register! Let’s not forget banks and the government. In this fourth and final section of the income statement breakdown, we need to make sure they get their share.

Like the other sections, you add up the various expenses you have here and subtract it from Net Profit. This section is sometimes called “Non-Operating Expenses”. If you have shareholders, some of their payouts go here, too.

Now let’s look at this part of the income statement and we’ll compare how the accrual and cash-based system work so you can see both in action:

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Tags: Accrual, Banks, Bottom Line, Cash Register, Gross Profit, Income Report, Income Statement, Money, Net Income, Net Profit, Net Sales, Operating Expenses, People, Shareholders, Statement Numbers

Income Statement Breakdown (Part 3): Operating Expenses

This is part 3 of a 4 part series on the income statement. Taking the time to understand each part of your income statement will help you to save money and make more money in your business.

In the Revenues section of your income statement, you started with Gross Sales and ended with Net Sales.  In the Cost of Goods Sold section of your income statement, you had the choice of either using the accrual method or the cash method to take the Net Sales number and end up with Gross Profit.

Now, we’re looking at operating expenses. Operating expenses, as the name implies, are the expenses associated with running your business. These expenses might include salaries, advertising, supplies, rent, insurance, utilities, and depreciation. These are added up and subtracted from the Gross Profit number we calculated in the last section of the income statement. The number we’ll end up here is sometimes called Net Profit and sometimes called “Income”.

Let’s keep building on the income statement of the fictional business we’ve been talking about, but we’ll use both the accrual example and the cash example so you can see how both work:

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Tags: Accrual Method, Business Expenses, Business Salaries, Cash Method, Depreciation, Gross Profit, Gross Sales, Income Statement, Insurance, Money, Net Profit, Net Sales, Operating Expenses, Raw Materials, Running, Shipping, Subtotal, Taking The Time

Transform Your Business With Spreadsheet Accounting – Part 1

When a new client approaches me to do their accounting for them, they often bring in their previous financial “system”… which usually consists of cardboard box overflowing with files, receipts, envelopes, and notebooks of spreadsheets. The first thing I do, before I start any official “help-them-save-money-and-make-more-money” accounting work, is to roll up my sleeves and systematize the avalanche of papers.

If your small and growing business doesn’t have an accountant yet, or if you want to make it really fast for your accountant to get through your records and start delivering the meaningful insight that you are hiring them to provide, you need to build and implement a spreadsheet-based accounting system as early as possible.

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Tags: Accountant, Accountants, Accounting System, Avalanche, Business Profitability, Cardboard Box, Cash Flow Statement, Envelopes, Google, Google Spreadsheets, Gross Profit, Income Statement And Balance Sheet, Meaningful Insight, Microsoft Excel, Profit And Loss, Profit And Loss Statement, Receipts, Spreadsheet, Step 2, Step 3