How should I track my purchases?
zp03
Member Posts: 2
Hello, Wave community!
I currently run a small retail business and had some concerns about tracking my purchases for the stock I purchase to resell on Wave. I am fairly new to accounting so kindly bear with me.
For my business, we purchase our items for a set price and then make adjustments to them to fit our business. For example, we include the cost of our packaging and other aspects into our cost price. So I will purchase something that costs $12 but after adjustments, it would be $15. At this point, I have yet to add my profit.
I am looking for a way to account for these two totals. If I follow the guide created by Wave on how to track inventory, should I use the $12 as the inventory amount and then consider the $15 to be the costs of goods sold? Again, I am new to accounting and any response would help! Thank you
Comments
@zp03,
For businesses that carry inventory you would have a cost of goods section on your profit and loss statement. Cost of Goods sold is just a section in the income statement that presents direct costs associated with the generation of sales. It is typically used by retailers and manufacturers. Keep in mind that inventory is an asset of the business and is not a deductible expense until sold. Wave has some limitations when it comes to inventory. FYI: There are 2 types of inventory accounting methods, perpetual and periodic. Perpetual involves the use of more sophisticated accounting software which is tied into the point of sale system the business uses. This moves inventory through the accounting records as it happens. Well beyond the scope of Wave and many others. So we are left with the second method which is a manual one. The periodic method is just that. Periodically, inventory is taken, cost determined, and books adjusted. In Wave this is accomplished through journal entries to reflect the appropriate inventory costs at a given point of time. The number of times you adjust inventory would be up to you. I have clients that adjust there inventory once a year and others that adjust quarterly or monthly. All depends on how accurate you want your books.
The easiest way to run your books when carrying inventory is to categorize all purchases for resale as Purchases. Any additional items such as packaging, add ons can be categorized in a separate account under the cost of goods section. Now that you have categorized everything to purchases, at some point you will need to determine inventory and adjust your books for items not sold.
Let's walk through a simple example. Using your numbers above, I buy 1000 of Item A for resale at $12 each. I also buy 1000 item B for $3 each. I purchase some boxes for $200 and have paid UPS $125 to ship some orders. I've sold 600 for the year at $30 each. Results on the income statement before any adjustments
Sales; 15000
COGS:
Purchases 15000 (1000$12+1000$3)
Packaging: 200
Shipping: 125
Gross profit: -325
At this point you can see there is a problem. The income statement says I didn't make a profit. But we are not accounting for what we have left. Remember inventory is an asset of the business. We take a walk through the shop and determined that we have 500 of item A and 500 of item B left. Knowing what we have left and how much it cost us will allow us to make an adjustment needed. At this periodic point, we know that we have a leftover inventory cost in item A of 6000 and 1500 in item B. To adjust for this, the following journal entry should be made:
Debit Inventory 7500 (6000+1500)
Credit Purchases 7500
After that adjustment our Profit and Loss would look like this
Sales 15000
COGS
Purchases 7500
Packaging 200
Shipping 125
Gross Profit 7175
Looks much better
There are various rules under IRS rules that allow for small business taxpayers to deduct the cost of supplies (i.e. packaging) so I elected just to treat the Packaging costs as an expense and not account for any leftover as Prepaid Supplies (another asset).
As you go through the year you would continue to categorize all items as purchases. The next time you adjust inventory, the entry will look different. It may even be backwards, if you have sold more than you purchased. This makes sense in a year where you burned through items you held at the beginning of the year but did not replace them.
Hope this helps you understand inventory.
@Mikeg Thank you for your response! I believe this should help me understand inventory better. I do have some more questions that I'd like clarification on though.
As mentioned before I have limited knowledge in accounting and Wave. Something that I am still unsure of is if we should categorize the purchasing of our inventory as an expense or as inventory?
Let's say I have product A for sale, it costs me $10 to purchase product A, where do I categorize product A? Inventory? Expense? I then spend $2 on the packaging is this a separate expense? How do I categorize it? should it be categorized as COGS ? I now sell product A for $40, how do I record this sale on Wave?
I Have 10 items of product A which would be 10x $10
I have to package all 10, therefore 10x $20 where do I categorize the purchasing of these items?
@zp03,
As I mentioned above, I would categorize Product A as an expense. The packaging would also be an expense. They would be categorized in accounts that are associated with Cost of Goods sold (a section of the Profit and Loss) If you need to set these accounts up go to :Accounting/Chart of Accounts. You should see the COGS section under Expenses. Transactions are recorded either manually or by connecting your bank account to Wave for auto import. If you recorded a manual entry for sales and deposited in your bank account
Debit Cash in bank 40
Credit Sales 40.
If auto import then categorize the deposit as Sales.
Not sure what you mean on your last 2 points. But what I was suggesting was when it's time to take inventory and report an accurate profit and loss, you would adjust your purchases by the inventory that was not sold. The example included the journal entry.