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Help with Setting up inventory and stock

accounting4meaccounting4me Member Posts: 26

Hi im still confused about how the inventory and cost of good sold feature works.
I am going to sell second hand items on ebay, so none of my items are the same.
Im trying to figure out what I should be doing.

Should I be listing every single item separately into my inventory with its original purchase price and then reconciling it the cost of cost of goods sold with a journal transaction when it sells. This seems like a lot of work and I am finding it hard to wrap my head around this idea.

Or
Is it better to not do inventory at all and just log all of my stock purchases under “expenses” and my sales under “income” (product sales) and keep a record of my inventory separately outside of wave?

I don’t know if there is a right or wrong way to do this.
Would love some advice on this, or if anyone thinks there is an easier or better way to do this I would love your advice.**

in Accounting Technical Support

Comments

  • MikegMikeg Member Posts: 995 ✭✭✭

    Accounting4me
    For most, the simplest way to handle inventory is to expense the items you purchase for resale. This is normally shown under cost of goods sold. At the end of the tax year you will need to determine the cost of your inventory you have left. You then credit Purchases (COGS) and debit Inventory (Asset) for that amount. I do this with my clients that have inventory. Every year after, we just adjust the balance of inventory left at year end with the offset being purchases.
    Mike G, CPA
    www.mgfinancial.net
    Better Service - Better Pricing

  • accounting4meaccounting4me Member Posts: 26

    Thanks @Mikeg.
    Can you please give a step by step example of how you would go this in my accounts.
    Please feel free to explain this to me as if im a 12 year old.

    I understand this much (I hope this is correct)
    *so when I buy stock, I list is as an expense under Cost of goods sold (I made an account for this called original purchase price)
    *then at the end of the year I add up the original purchase price off all of the inventory that I have left over.

    Does this mean that I need to keep records of each item I purchased individually?
    If so do I record them individually into wave cost of goods sold and then make a journal transaction to reconcile each item I sell with its corresponding GOGS account?
    Or am I suppose to store my inventory els ware outside of wave (like on a spreadsheet)

    Ok this is where I am confused:
    Why do I credit perches (GOGS) and debit (assets) for the remaining amount?
    And what do you mean you offset the inventory left over at the end of year with the offset being perches.

    Thank you so much for yet help. I know I'm a bit of a simpleton, I ready struggle with the mapping side of things.

  • MikegMikeg Member Posts: 995 ✭✭✭

    accounting4me,
    Since you are selling a variety of items, in order to determine ending inventory value, you should keep a list of cost. I would have a spreadsheet. Your second question: The reason why at the end of the year you would debit inventory and credit purchases is because (assuming you are in the US) for tax purposes even cash method taxpayers (you) are required to account for inventory. Basically, the IRS does not allow you to write off your purchases for resale that you haven't sold. This is because you have not generated the revenue associated with the purchase. This would be an annual adjustment that would be made since you report to the IRS annually. Hope that makes sense. Feel free to call me at 443-851-4054. Be happy to answer any additional questions or explain further.
    Mike G, CPA
    www.mgfinancial.net
    Better Service - Better Pricing

  • accounting4meaccounting4me Member Posts: 26

    Ok great got thanks!!!

    Unfortunately I cant call you because I live in Australia, but thank you kindly for your offer!

    So, I think I understand a bit better now.

    For example,
    In the article in wave, it explained how to account for inventory. I think wave was referring to the perpetual inventory method which is way to much work to do manually.

    I think the method you are telling me about is called the periodic inventory method. Which is more manageable for someone like me.

    Is this correct?

    I also have another question.
    When I expense my GOGS account (for my stock perchases), am I then supposed to do something to my inventory assets account, or do I wait until the end of the year to fix it up.
    From what you said befor I was getting the idea that I don’t add anything into my assets account until the end of the year when I see how much stock I have sold. Is this correct?
    Sorry im still a bit confused about how to use my chart of accounts

    I hope I don’t sound like im just repeating what you have said, just trying to make sure I understand what im doing.

    Thanks once again!

  • accounting4meaccounting4me Member Posts: 26

    Or for every purchase I make, do I need to Expense my GOGS (stock purchase) and then make a corresponding journal entry to Credit my Assets account (Inventory)

    And then keep a seperate speed sheet of my inventory and purchase price outside of wave?

  • MikegMikeg Member Posts: 995 ✭✭✭

    Accounting 4me,
    Yes I was speaking of periodic style. I not familiar with Australia's tax laws when it comes to inventory. Once I have established an inventory value at the beginning of a fiscal year, I do not change that value until the end of the next fiscal year. All purchases for resale go through COGS. At the end of a fiscal year you determine what you have on hand and adjust you inventory (asset) by doing a debit or credit to purchases.
    Let's say 1st fiscal year
    You buy $25000 worth of purchases for resale. Debit Purchases (COGS) Credit Cash. At the end of the year you have $5000 worth of widgets. Debit Inventory (asset) credit Purchases (COGS). By doing that entry you are not expensing what you didn't sell. Next year you buy $50000 more widgets. Debit Purchases (COGS) Credit Cash. You look around the shop and figure you have $7500 worth of widgets. Again Debit Inventory $2500 Credit Purchases (COGS) $2500. You now have the $7500 in inventory (asset) and you adjusted the purchases for items bought but not sold. Year 3 was a little better in sales as your widgets are the latest craze. You buy $75000 widgets and only have $1000 at the end of Year 3. Debit Purchases (COGS) 75k credit Cash 75k. Now your inventory is still at 7500. You would adjust by debit Purchases COGS credit Inventory 6500.
    Best of Luck
    Mike G

  • accounting4meaccounting4me Member Posts: 26

    Ok great, thanks for that, it has taken me a bit to try to understand but I think I get it.

    So if I start with $0 worth of inventory, I would buy my inventory throughout the year (say $500 worth) and expense it under cost of goods sold. Then at the end of the financial year I count how much value in stock I have left (say $100 left over).
    So then I would then deduct $100 from my COGS making my cost of goods sold $400 (because that's how much I sold), and add $100 into my inventory/ assets account because thats how much inventory I have left over.

    Does this sound right?

  • accounting4meaccounting4me Member Posts: 26

    And the next year my inventory balance will start at $100 where it left of from the year before

  • MikegMikeg Member Posts: 995 ✭✭✭

    That is correct.

  • accounting4meaccounting4me Member Posts: 26

    Thank you so much! You are a legend!!!!!!!!!!!!

  • CottageKeeperCottageKeeper Member Posts: 3

    Thanks, @Mikeg, and @accounting4me - this is a huge help for me too! :)

  • sakthis7sakthis7 Member Posts: 1

    Thank you @Mikeg!! very helpful

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