USA COGS

[mruk6823]

I work as a bookkeeper and right now I am working with my boss to get the books ready to go to the accountant.
My boss is upset that we made money in 2019. He says this can't be right because our COGS are too low.

We are furniture manufacture...kind of. We purchases our designs from a local wood worker and then finish them to our clients specifications. When ordering some times we only buy what we need, other times we order many. Upon delivery of the items we enter the invoice any times we order and buy 10 of item, expense the item and cut a check to our vendor. We might sell 2 right away but then 8 will sit on the shelf waiting to be sold. Some times it can be years.

We bought less from our vendor as we sold the stock that has been sitting on the shelf for the past 10+ years. He thinks that even though is was expenses in previous years it still should be part of our COGS for this year. I am under the impression the item was already expense and was part of the COGS in a previous year so it would not be part of the COGS for this past year. Is this correct? Or am I missing something. Any clarification would be appreciated.

 

[kirby]

Sounds like you and your boss are having a "fun with accounting festival." IN GENERAL: When you purchase the designs those costs should be debited to "Inventory." Then when the inventory is sold you credit the inventory and debit COGS.

 

[Drmdcpa]

Hmmmm.

If it was expensed thru COGS in a prior year, it certainly should not be expensed again. But maybe it should not have and maybe it was not actually expensed in the prior year.

If your inventory is fast moving and immaterial, your accountant may have let it get expensed when it should not have.

Technically though, you should be making an adjustment annually to correct inventory on hand.

I have many clients that book all purchases to COGS throughout the year. When I do their taxes I have to ask them what was the value of inventory on the books.

Knowing what it started with from the prior year, I can determine the change in inventory and adjust COGS accordingly. This prevents premature expensing of COGS.

But often when I ask for the value of inventory, the answer I get is "what do I need?". My response is I cannot answer that. They then usually give me a figure indicating whether it is more or less than the prior year.

When reviewing the return I compare profit margins over years. Also understanding the 30/30/30/10 cost structure, I will inquire further if the end result is not comparable or significantly different than the expected cost structure.

You should tell your boss, you are in business to make money. So make sure your accounting is reasonably accurate, make the money and plan to pay taxes. If you are making money, you are going to pay taxes. Your goal becomes minimizing them without forgoing income.