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how to find COGS for a cash basis business

Forum|Forum|6 years ago
June 4, 2020
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I run a sole proprietorship business. I use materials and labor for invoicing. I am on cash basis. I don't track inventory. Materials are small items like nuts, bolts, hose clamps, etc..

My tax advisor wants to use the (2019) tax year's Cost of Materials Paid Amount total as COGS in part III of Schedule C. That is, Cost of Goods Sold.

This seems wrong to me. The Cost of Materials account essentially consists of credit card charges and invoices. I want to use just the credit card charges ($2330 in 2019). In other words, what I paid to vendors. The "Paid Amount" column has charges and invoice amounts for the each transaction. They tend to cancel out to much less than I paid ($776 in 2019).

Which is right? Also, what is the easiest way to come up with the total of what I paid vendors for parts from QuickBooks?

Just say no to 'items'.

Note: The only "Item" I set up and still use is an hour or my labor. I don't use a QuickBooks 'item' for each of my purchases. I tried creating a 'hardware' item, but this hid my descriptive memo of what it is (like hose clamp), and just showed 'hardware' on my invoices. No way is that OK. So I just enter the transactions, not create a new 'item' each time or use a general 'item'.

QuickBooks Desktop

Best answer by Teri11_2

If you do cash-basis accounting and cash-basis taxes, only amounts paid in cash during the year count. One reason is that you need to make sure you do not double count the same expenses in multiple years.

If you don't track inventory, then COGS is just a subtotal of Direct cost (cost purchased for customer jobs). Regardless of whether paid to vendor by invoice or credit card, amount for taxes is what is paid in cash.

Totals you need for tax return should start with the totals on income statement assuming done correctly. Then there may be adjustments to those amounts to get to tax deductible totals and usually a little less.

I am not a tax accountant, but have done accounting for 30 years and this is very basic accounting/taxes.

JoesemM

Hello there,@DMD.

When setting up an inventory item, the system automatically add Cost of Goods Sold account to your Chart of Accounts.

The Cost of Good Sold (COGS) will only be realized when the item is being sold out. This account isn’t meant for the items you use to create your products, such as raw materials. You can double-click the amount to see the sales transactions.

You can run the Profit and Loss report to show the COGS. Here's how:

On the Profit and Loss report, click the amount next to the Cost of Goods Sold account.
Click the entry to open it.
Go to the Reports tab, then click Transaction Journal.

I've added the Customize company and financial reports link to help you easily get a view of how well your business is doing.

If you have other questions or concerns, don't hesitate to leave a comment below. I'll be around to help.

D

DMD11Author

Josem, Thanks for the suggestion.

I don't see a "Cost of Goods Sold" account in the Chart of accounts. I do see a "Cost of Goods Sold" account type. That's the type assigned to the "Cost of Materials" account.

I ran the Profit & Loss, and double clicked on Cost of Materials. This brought the "Transaction Detail By Account" report. Then I clicked Customize Report. I added a Transaction Type filter, "Credit Card". The result, $2203, is that I can see nearly what I spent, $2330. Actually there are more transaction types in this account, like Check, so I have to fiddle with Transaction Type/Multiple types to get it right.

The other method I used to find COGS is to 'Excel export' "Cost of Materials" to .csv. Then in a spread sheet, I sorted on the amount column. This put all the invoice amounts together at the bottom because they are negative. Then I deleted all the invoice rows and summed amount.

But I still don't know if this is right for the tax. The tax preparer said to take the year of end total, including the invoices. I'm 90% sure the invoice transactions should not be counted.

Still I need to know what is correct for the schedule C Cost of Goods Sold.

D

DMD11Author

P.S.

These materials are not part of my product. They are part of my customer's product. I buy them for him, and he reimburses me after I invoice him. In the invoice, each item purchased is listed. No mark up.

T

Teri11_2Answer

If you do cash-basis accounting and cash-basis taxes, only amounts paid in cash during the year count. One reason is that you need to make sure you do not double count the same expenses in multiple years.

If you don't track inventory, then COGS is just a subtotal of Direct cost (cost purchased for customer jobs). Regardless of whether paid to vendor by invoice or credit card, amount for taxes is what is paid in cash.

Totals you need for tax return should start with the totals on income statement assuming done correctly. Then there may be adjustments to those amounts to get to tax deductible totals and usually a little less.

I am not a tax accountant, but have done accounting for 30 years and this is very basic accounting/taxes.

D

DMD11Author

Thanks Teri,

"only amounts paid [by me] during the year" answers my question. I can and have figured that, $2330.

My Profit and Loss by customer (there's just one customer) has a COGS of $757, which includes the amounts I invoiced my customer and my actual cash purchases. So, I think I am doing something wrong in my accounting.

I will just file taxes with the correct, $2330 figure, and fix the accounting soon. I will probably have an accountant look at my company file. The tax advisor said I will using groups incorrectly, I will look into that more.

Candice C

Hello, @DMD11.

Thanks for reaching back out to the Community. I'm glad that you were able to get some information that was helpful to your issue. Consulting with your accountant will allow you to receive the best accounting advice for your business. If you don't have an accountant, you can check out this link to find one near you.

If you have any other questions, just press the Reply button below. Have a great day!

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