USA New Business - Beginning Inventory & COGS

[GrantH]

I will soon be launching an ecommerce t-shirt business. My inventory will mainly consist of heat transfers and blank shirts. When someone orders a shirt, I press the desired transfer on to the desired shirt and ship it out. My plan to calculate COGS for tax purposes is your basic formula of "beginning inventory + additional inventory purchases - ending inventory."

My question: I purchased some of these transfers and blank shirts last year, before being in business. Given that, what would my beginning inventory for this year be? Would it be what I purchased last year or zero? I've read that it MUST always be zero for the first year in business, is that right? If so, how would I then account for the inventory purchased last year so that it can be included in COGS?

Thanks in advance for any help.

 

[Werner Reisacher]

When you are setting up a new company, you must contribute assets in order for the company to become operational. These assets can be in form of cash or any other type of "assets". US accounting rules define that the value of these assets must be either
- the original cost of the assets
- or its fair market value - whichever is lower.
Consequently, you can record the "value" of the material you purchased as initial inventory.

 

[GrantH]

Thank you for your reply. Just to be sure I understand, are you saying that if I purchased $1000 in shirts and transfers before opening for business, I should enter $1000 as my beginning inventory? And then this inventory would be included (as usual) in COGS, as I make sales?

Sorry for the dumb questions, I'm obviously a newbie.

 

[Werner Reisacher]

No questions are dumb. I wish I could say the same about answers.
And yes, if you paid $ 1000 for shirts and transfers, and if todays' market value of these items is not lower than at the time you purchased them, you will
Debit: Inventory
Credit: Personal Loan as a liability account
or capital as capital / equity account.
or one part as personal loan (liability) and the other part as capital (equity)

 

[GrantH]

Thanks, Werner.