Calculate Your Capital Gains Tax in 5 Easy Steps

If you’ve sold stock, real estate, or other assets at a profit, you will have to pay income tax on that profit — known as capital gains tax. The amount you pay depends on your income bracket.

Here’s how to figure how much tax you owe. Bear in mind, this calculation is for long-term capital gains — on assets you owned for more than one year. (Short-term capital gains on assets held for one year or less are taxed as ordinary income.)

1. Figure the basis.

The basis is usually the purchase price plus fees or commissions you paid to make the purchase. You may also need to add reinvested dividends on stocks and other factors.

2. Figure the realized amount.

Start with the amount you sold the asset for and subtract any commissions or fees you paid to make the sale.

3. Subtract basis from the realized amount.

The result is your capital gain. (If the result was less than 0, you have a capital loss. Capital losses can be used to offset capital gains on your income tax return.)

4. Determine your tax rate.

For 2018 taxes, the rates are:
• 0% if your income for the same tax year is below $38,700 and you are filing as single, or below $ 7,400 if married filing jointly
• 15% if income is between $38,701 and $500,000 and you are filing as single, or between $77,401 and $600,000 if married filing jointly
• 20% if income is over $500,000 and you are filing as single; or over $600,000 if married filing jointly

Calculate your tax. Apply the tax rate percentage from step 4 to the capital gain amount from step 3. For example, if your tax rate is 15% and your capital gain is $3,000, your tax will be $450 (3000 x 0.15 = 450).

In most cases, capital gains and losses are reported on IRS Form 8949 and Schedule D of your income tax return.

If you have any questions about your capital gains tax liability, or any income tax questions, please feel free to contact your Xendoo tax professional. It’s all part of our service, which sets your mind at rest so you can stay focused on growing your business.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

The Early Bird Gets the Worm: How to Save on Sales Tax

For retailers, e-commerce sellers and other businesses that are required to collect sales tax from their customers, it’s a plain nuisance to report and remit that tax to the state tax authorities. But did you know that in many states, remitting on time or early brings you a nice discount?

That’s right, you get to keep a percentage of the sales tax you collect!

Look on the state’s sales tax filing form to see what discounts are available. (Sometimes they only apply to certain types of sellers or situations.) If you think you should get one that’s not on the filing form, contact the state’s department of revenue.

A State by State guide to the sales tax discount

Alabama: If the tax is paid before the 20th day of the month, the discount is

• 5% of the first $100 of tax due

• 2% of tax over $100, up to $400

Arizona: If tax is paid on time, the discount is 1% of the tax due, up to $10,000 per calendar year.

Arkansas: If tax is paid before the deadline, the discount is 2% of the tax due, up to $1,000 per month.

Florida: If tax is paid on time and paid by E-file/E-pay, the discount is 2.5% of the tax due, up to $1,200 per month.

Georgia: If tax is paid on time, the discount is

• 3% of the first $3,000

• 0.5% of tax over $3,000

Illinois: If tax is paid on time, you may choose the greater of

• 1.75% of the tax due; or

• $5 per calendar year

Indiana: If tax is paid on time, the discount is

• 0.93% if annual tax collected totals less than $60,000

• 0.6% if annual tax is between $60,000 and $600,000

• 0.3% if annual tax is more than $600,000

Kentucky: If tax is paid on or before the due date, the discount is

• 1.75% of the first $1,000

• 1.5% of tax over $1,000, up to $1,500 and/or a maximum of $50 discount received

Louisiana: If the tax is paid on time, the discount is 0.935%.

Maryland: If tax is paid on or before the due date, the discount is

• 1.2% of the first $6,000

• 0.9% of tax over $6,000, with a maximum of $500 discount received

Michigan: You may choose the greater of two options:

• If tax is paid before the 12th day of the month, the discount is 0.75% of up to $20,000; if paid between the 12th and 20th day of the month, the discount is 0.5% of up to $15,000

• If tax is paid on time, deduct the tax collected on $150 purchase price

Mississippi: If the tax is paid by the 20th day of the month, the discount is 2%, with a maximum of $50 per month and $600 per year discount received.

Missouri: If the sales tax return is postmarked before the due date, the discount is 2%.

Nebraska: If the tax is paid on time, the discount is 2.5% of the first $3,000.

Nevada: If the tax is paid on time, the discount is .25%.

New York: If the tax is paid on time, the discount is 5%, with a maximum of $200 per quarter (or longer) discount received.

North Dakota: If the tax is paid on time, the discount is 1.5%, with a maximum of $110 per month discount received.

Ohio: If the tax is paid on time, the discount is 0.75%.

Pennsylvania: If tax is paid on time, the discount is

• For monthly filers, the lesser of $25 or 1% of the tax due

• For quarterly filers, the lesser of $75 or 1% of the tax due

• For semi-annual filers, the lesser of $150 or 1% of the tax due

South Carolina: If tax is paid on time and in full, the discount is

• 3% of tax less than $100

• 2% of tax over $100, with a maximum of $3,000 per fiscal year discount received ($3,100 if filing electronically)

Tennessee: A discount is ONLY available for out-of-state sellers who are filing voluntarily through the Streamlined Sales Tax Initiative. The discount is

• 2% of the first $2500

• 1.15% of tax over $2500

Texas: Discounts are

• 0.5% of tax paid on time; plus

• 1.25% of prepaid tax

Utah: Discounts are offered for both in-state and remote sellers who file returns on time.

• For sellers with state nexus, the discount is 0.75%

• For remote (non-nexus) sellers, the discount is 18%, but to receive it you must file electronically at the Utah Tax Commission website or the Streamlined Sales and Use Tax Agreement’s simplified electronic return (SER)

Virginia: If you owe less than $20,000 in state — not local — sales tax, discounts (with some exceptions according to tax type) are

• 1.6% of $0 to $62,500 monthly taxable sales

• 1.2% of $62,501 to $208,000 monthly taxable sales

• 0.8% of $208,001 or greater monthly taxable sales

Wyoming: If tax is remitted on or before the 15th day of the month, the discount is

• 1.95% of the first $6,250

• 1% of tax over $6,250, with a maximum of $500 per month discount received.

As we’re sure you know, the flip side of early payment discounts is late payment penalties. Don’t let lack of time or knowledge to get tax filings done accurately and speedily cause your business to lose money.

When you let your Xendoo team handle the sales tax filing hassles, you can rest assured that you’ll be taking advantage of every money-saving opportunity possible. Meanwhile, you’ll be enjoying the freedom to focus on making your business grow.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

How to Report Florida Sales Tax

Whether you’re a brick-and-mortar business located in Florida or an e-commerce seller who ships to customers in the state, one hassle you can’t get away from is collecting and remitting the state sales tax.

The first thing you need to know is that Florida is a destination-based sales tax state. That means you’ll charge customers the Florida tax rate, not the rate of whatever state their purchase shipped from. Currently, the Florida sales tax is:

Complicating things even further is that many counties in Florida also have a discretionary surtax. For a list of the counties and their tax rates, visit the Florida Department of Revenue’s Discretionary Sales Surcharge page.Before you get started, gather the information you’ll need, including:

  • Records of sales and taxes collected
  • Your Florida sales and use tax certificate number
  • Your state-assigned filing frequency
  • Your Florida electronic filing log-in details (user name, password)
  • Bank routing and account numbers from which you’ll make the sales tax payment

To file your sales tax return, you’ll need Form DR-15. To submit a physical return with a check or money order payment, print out the form from here.The Florida Department of Revenue also provides instructions on filling out Form DR-15.To file and pay your sales tax online, start at the Florida Sales and Use Tax, Prepaid Wireless E911 Fee, and Solid Waste Tax, Fees and Surcharge Website (which is the same place you’ll be directed to if you start on the Florida Department of Treasury’s home page, and click on the “File and Pay” box).From there, follow the steps outlined in Florida’s e-File and ePay instructions.

You can also print out a comprehensive tutorial if you want to keep it in your office. If you’re a new business, you will first need to register for a Florida sales tax permit (the permit number will be needed on your sales tax filing). Find information and application forms on the Florida Department of Revenue’s Account Management and Registration page. Right about now, you’re probably thinking that all this red tape is not fun — and not what you thought you’d spend your time doing when you went into business. That’s what Xendoo is here for. We’ll handle all the sales tax calculations, reports and payments — even if you’re selling in all 50 states (each of which has their own rules and regulations). Now you can get back to doing the fun parts of your business!

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

New Jersey Resale Certificate — A Guide for Buyers and Sellers

A state resale certificate exempts you from paying sales tax on items or services you buy in that state for the purpose of reselling, renting, or leasing them out. Here’s an overview of the regulations you’ll need to follow in the state of New Jersey.

Sales Tax Exemption for Buyers

Purchases that qualify for the sales tax exemption include any products that will be resold in their present form, as well as physical components of products made or repaired by your business.

Purchases that DON’T qualify include:

  • Office supplies
  • Tools and equipment used by your business
  • Materials and services used for capital improvements to your business
  • Anything for your personal use

For example, if you make beaded jewelry for your online store, you don’t have to pay sales tax on purchases of beads, but you do have to pay it on the needles you use to string the beads.

When making your purchase, you’ll present the seller with one of the certificates listed below, which you’ve printed out and filled in completely:

  • Form ST-3 Resale Certificate for in-state resellers
  • Form ST-3NR Resale Certificate for out-of-state resellers

Both of these forms require you to fill in a tax identification number — which means you must have applied for and received a permit to collect sales tax (and must then file periodic sales tax returns). If you’re not registered to collect sales tax in New Jersey, you can use either your tax registration number from another state(s) or your federal employer identification number.

Learn more about the New Jersey resale certificate in New Jersey’s Bulletin S&U-6.

Be aware that sellers are not required to give you the tax exemption, even if you present a valid resale certificate. Target, for one, is well-known for refusing to accept resale certificates. Also, they are required to check that your certificate is legit, and can suffer major penalties if it’s not — so don’t bother trying to fake it.

You may be wondering what happens if you never sell the items you bought tax-free. If they are determined to be unsellable, you can remit use tax rather than the sales tax on them to avoid the penalty.

Sales Tax Exemption for Sellers

As stated above, you’re not required to give a sales tax exemption to anyone who asks for it, even if they have a resale certificate. Be aware that if you do, the responsibility lies with you to confirm the validity of the certificate.

If it turns out to be invalid, you could be on the hook for paying the sales tax, plus assorted fines and penalties.

Make sure that the certificate is completely filled out, including tax registration number, date, and signature. If you accidentally accepted one that is incomplete or incorrect, you have 90 days to obtain a revised one from the buyer.

The State of Jersey offers a quick link to check the authenticity of the resale certificate.

The New Jersey Division of Taxation requires that you keep the certificate in your files for 4 years from the date of the transaction so that it can be inspected if necessary.

Of course, to accept a resale certificate, your own business must be registered to collect sales tax in New Jersey.

Have more questions about sales tax exemptions, registrations, collections, or filings in the state of New Jersey? Leave it to your Xendoo tax professional to keep all that part of your business running smoothly, so you can spend more time doing what you love.

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Xendoo wins Rise of the Rest

Xendoo wins Revolution’s Rise of the Rest Pitch Competition

FORT LAUDERDALE, FLA. (PRWEB) MAY 16, 2019

 

Lil Roberts, Founder, and CEO of Xendoo, a South Florida-based tech company, has won Revolution’s Rise of the Rest pitch competition in Miami, FL, and has received a $100,000 investment, joining Revolution’s Rise of the Rest Seed Fund. As one of eight finalists out of 540 Florida applicants, Roberts is “thrilled to represent South Florida and women-led tech companies.”

Xendoo is no stranger to the winning stage, and won eMerge America’s 2018 startup showcase, which earned the company a $100,000 investment from Silicon Valley’s Launch Incubator.

Rise of the Rest is a nationwide effort powered by Revolution to invest in and work closely with entrepreneurs in emerging startup ecosystems. Since 2014, Steve Case and the Revolution team have logged more than 11,500 miles touring entrepreneurial communities by bus in 43 cities. In 2017, Case and JD Vance announced the $150 million Revolution Rise of the Rest Seed Fund, backed by a group of iconic entrepreneurs, executives and investors that believe the next great startup investments are outside of traditional tech hubs like Silicon Valley and New York City. Last year, over 75 percent of all venture capital investments in the U.S. went to California, New York and Massachusetts. Florida, the third most-populous state, only accounted for under 2% of venture funding.

During the final segment of the Rise of the Rest Road trip, Roberts took to the stage and pitched Xendoo to all-star judges including AOL co-founder Steve Case, Chewy.com founder Ryan Cohen, BET co-founder Sheila Johnson and other esteemed tech and business leaders.

Lil Roberts accepted the $100,000 investment with an “attitude of gratitude” and thanked her team and the eMerge Americas’ family for their support throughout Xendoo’s journey. By pairing “human and machine, we’re changing the relationship people have with getting their accounting done. We’re helping small businesses succeed,” added Roberts.

The company’s technology delivers financial peace of mind to the underserved small business community by giving them timely visibility into their financial health.

“We are extremely grateful to Steve and Revolution, and the Rise of the Rest Road Trip for putting South Florida on the tech map.” Roberts says. “We are thankful and excited for the journey ahead.”

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

Getting started with A2X for Shopify

About A2X for Shopify

A2X for Shopify imports your Shopify payouts and sales and posts them to your accounting system in a way that makes it easy to reconcile the sales, refunds, discounts taxes and shipping against the cash receipts.

A2X for Shopify has several benefits for accounting:

  • Reconciles Shopify Payments perfectly, including all fees
  • Accurate Shopify data imported automatically
  • Scales to support 1000’s of daily orders without sending 1000’s of individual invoices to the accounting system.
  • Supports multiple Shopify stores connecting to a single accounting system for multi-channel sellers.
  • Supports multi-currency sellers and multiple tax rates

Supported Payment Gateways

  • Shopify Payments – payouts will reconcile directly to bank deposits
  • PayPal – transactions posted to the accounting system with a clearing account
  • Amazon Pay – transactions posted to the accounting system with a clearing account
  • Authorize – transactions posted to the accounting system with a clearing account
  • Afterpay – transactions posted to the accounting system with a clearing account
  • Other gateways – posted to an accounting system with a clearing account, please contact support for specific gateway information.

Creating an A2X for Shopify account

Create a new A2X for Shopify account from the Shopify sign-up page.

If you already have an existing A2X for Amazon account, you will be asked to confirm you wish to create a new account.

Once your account is created it should look like this:

Now you are ready to set up your new A2X for Shopify account.

Connecting an A2X for Shopify account to your Shopify store

Click the green ‘Connect to Shopify’ button and input your Shopify shop in the form below and click ‘Connect’:

You will be redirected to your Shopify store and asked to log in and grant A2X permission to connect to your Shopify store. You must grant this permission in order to use A2X for Shopify.

Once the permission is granted you’ll be redirected back to A2X and your first payouts will begin to import into A2X – this process usually takes 10-20 minutes to begin populating in your account and for larger Shopify stores can take several hours to complete.

Once imported you should see the payouts like this:

Note: If you are not seeing any payouts after an hour, please check that your Shopify store uses the Shopify Payments gateway – if not you will need to enable the other payment gateways on the Settings > Connections page first.

Connecting to your accounting system

Click the Connect button for your accounting system and proceed with the connection process. You will be redirected to your accounting system to grant A2X permission.

If you are connecting A2X for Shopify to the same accounting system that you are already connected to with a different A2X account (either with Amazon or a different Shopify store), you should choose to use the existing connection, rather than create a new connection.

Configure the accounts and taxes for your Shopify sales

You need to configure A2X for Shopify to map your Shopify transactions into your accounting system.

A2X will offer to create several generic default accounts, or you can select your own individual mappings. We recommend working with your accountant on this initial setup as it will impact how the Shopify transactions appear in your financial reporting.

You can also customize how the A2X transactions are created, such as grouping the sales by country or province in the Settings > Invoice settings section of A2X. This can help if you have specific tax handling requirements for some countries.

Shopify Payments Gateway

The sales, refunds, and other transactions that are paid via Shopify Payments will be imported to A2X in their own payouts, these will be posted as a single batch of transactions and will always match perfectly to the corresponding deposits from Shopify.

Other Payment Gateways

If you use other gateways or payment methods on your Shopify store, these will be imported separately into A2X for Shopify. Typically you will need to define a clearing account for each one and post the corresponding payment proceeds to the same clearing account. The exact configuration for these accounts will differ depending on the payment methods.

You can enable, configure, and preview these settlements in Settings > Connections.

For more information about these mappings or if you have specific requirements that are not handled by the current mapping, please contact the A2X support team.

Post your Shopify payouts and reconcile them in your accounting system

Once you have connected and configured your account, you can send your payouts to your accounting system. To do that, click the Send link.

You will see the payout in your accounting system and be able to match or reconcile it to the corresponding deposit. For example here is Xero’s bank reconciliation screen showing the matching payouts.

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Self-Employed? Calculate Your Quarterly Estimated Income Tax

If you’re an independent contractor, sole proprietorship, partnership or S-corporation, you’re probably required to pay your income tax in four installments throughout the year.

Why? Because you have no employer taking that tax out of every paycheck and sending it to the U.S. Treasury. Yet the government still needs your tax money coming in to cover its ongoing operating expenses. Thus, we have a quarterly estimated tax.

There are a few exceptions to the requirement to pay estimated taxes:

  • You expect to owe less than $1,000 income tax
  • Businesses filing as a corporation who expect to owe less than $500 income tax
  • You did not owe any taxes for the previous tax year and did not have to file a tax return

Why “estimated”? Because you’re paying tax on this year’s earnings before they’ve even happened. Next April when you do your annual tax return, you’ll have your real income amount and taxes owed for the year. The quarterly taxes you already paid will be compared to the actual amount owed, and any difference will be resolved by either a refund to you or an additional payment from you.

How to do the calculation for estimated quarterly taxes

1. Estimate your adjusted gross income, taxable income, deductions, and credits.

The easiest way to do this is to use the previous year’s figures. Example:

2. Calculate income tax.

For this, you’ll need to find out your tax rate (based on your income), as listed in the IRS’s tax brackets. They change every year, so be sure you’re looking at the current rates. The tax brackets for 2018 are here.

Using the $73,000 taxable income from the example in step 1, it would be subject to a 22% tax rate. That works out to $16,060 tax owed (73000 x .22 = 16060).

3. Calculate the self-employment tax.

This is a combination of the Social Security and Medicare taxes that would normally be taken out of your paycheck if you were working as an employee. If you earned more than $400 in the year, you are required to pay this tax.

Step A. Calculate your self-employment taxable income by multiplying the estimated gross income by 92.35%. For example:

$100,000 Estimated gross income

x 0.9235

= $92,350 Self-employment taxable income

Step B. Calculate the tax by multiplying self-employment taxable income by 15.3%. For example:

$92,350 Self-employment taxable income

x 0.153

= $14,129 Self-employment tax

4. Add income tax and self-employment tax.

That’s the total amount of estimated tax you owe for the year. Using the same example:

$16,060 Estimated income tax

+ $14,129 Estimated self-employment tax

= $30,189 Total tax

5. Calculate your quarterly payment.

Divide the estimated total tax by 4. In our example, $30,189 / 4 = $7,547. That’s the amount of the check the individual in this example will write (or pay online) to the U.S. Treasury each quarter.

For the 2019 tax year, estimated quarterly payments are due:

• April 15, 2019

• June 17, 2019

• September 15, 2019

• January 15, 2020

There are a few other specific situations to be aware of in order to avoid penalties. For example, you must pay at least 90% of what you owe; and if your income is more than $150,000 per year, then you must pay 110% of last year’s tax.

If you have any questions about your estimated quarterly tax or any income tax questions, please feel free to contact your Xendoo tax professional. It’s all part of our service, which sets your mind at rest so you can stay focused on growing your business.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Do You Really Want to Be a 1099 Independent Contractor? Pros and Cons

Quitting regular employment and being your own boss can indeed be a dream come true. However, you’ll also have some new hassles to deal with. Only you can decide if the trade-off is worth it.

Pro: Being Independent

There’ll be nobody telling you what to do, how or when to do it (except, to some extent, your clients). No more punching a time clock, or using an outdated, ineffective process “because that’s how we’ve always done it.”

Con: Being Independent

It also means you’d better be good at self-discipline, or else pretty soon you’ll find that no work is getting done and no money coming in.

Pro: Getting Paid What You’re Worth

Many professionals decide to go solo when they realize their employer is charging its clients double or triple what they’re paying the employee to provide that service. Why not work directly with those clients and earn the big bucks?

Con: Getting Paid, Period

As an employee, you’re guaranteed a regular income. That won’t happen when you’re freelancing. It almost seems to be a rule that you’ll have either feast or famine: periods where you’re slammed with work, and others with no work at all. If possible, have a cushion of six months living expenses in the bank to tide you over the lean times.

Also, as a sole provider, you’ll run into clients who can’t or won’t pay you — and don’t try very hard because they think they can get away with it. So it’s a very good idea to always get a contract. And be prepared to make some collections efforts as part of your billing process.

Pro: Lots of Tax Deductions

From home office maintenance to equipment depreciation to travel, there are literally dozens of deductions you can use to reduce your income tax. You’ll probably pay less tax now than you did as an employee.

Con: Buying Your Own Equipment

Of course, the reason you’re getting those deductions is that you own those assets. When you work for someone else, they buy all that. Depending on your industry, you may face some hefty start-up costs.

Con: More Administrative Work

Some people enjoy having control over business functions that they didn’t as an employee — such as sales, accounting, and growth planning. Others hate spending time on anything that’s not their specialty. Most fall somewhere in the middle, knowing that there will always be some boring or unpleasant aspects to any job.

Con: No Benefits

Employees enjoy a variety of benefits from their employer, such as lower-cost group health insurance, unemployment insurance, workers’ compensation, and 50% payment of Medicare and Social Security taxes (which will now be 100% your responsibility). In addition, they have more protection from federal and state labor laws.

This list shows more cons than pros to being an independent contractor. However, the vast majority of freelancers are happy with their decision and have no interest in going back to work for someone else. After all, there’s a reason why more than a third of all U.S. workers are now part of the “gig economy.”

If you really want to do it, you can! And Xendoo will be here to help with accounting, bookkeeping, and tax issues you may not be familiar with. We specialize in small businesses, and we love helping them grow.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

7 Benefits of Inventory Accounting

If your business sells, resells, or makes new products from purchased stock, then your inventory is probably your biggest asset. The right accounting tools can help you make sure that inventory maintains its value, as well as guide business decisions for maximum success.

Types of Inventory

First, determine what type of inventory you work with.

Items for Reselling

The stock of a retail store, or the retail component of a service business such as a hair salon. (Drop shipped products don’t count if you never bought them from the supplier.)

Items for Installing

Products sold by a service business as an essential part of the job, for example, a computer repair company that sells spare parts.

Items for Manufacturing

Materials you make into products for sale, for example, fabric, beads, thread, etc. for making wedding gowns. For accounting purposes, they will be assigned to one of three categories:

• Raw materials
• Work in progress
• Finished goods

Basics of Inventory Accounting

To keep tight control of your inventory, set the right prices, properly insure the stock and do your taxes, you’ll need to track the number of variables. Your accounting software should be able to show you:

• Cost of goods
• Associated costs including storage, shipping, and losses due to damage or age
• Stock on hand
• Selling price
• Revenue
• Profit (or loss)
• Items sold
• Sales patterns by item and season

You must also choose an inventory valuation method for your year-end statement, which will affect both your profits and tax liability. The most common ones are:

LIFO (Last In, First Out): Assumes you sell your most recently acquired — therefore most expensive — items first, while leaving older/lower priced stock on the shelf.

• Advantage: Increases the cost of goods sold and lowers net income, reducing taxes.
• Disadvantage: May does not correspond to the actual flow of goods or replacement costs.

FIFO (First In, First Out): Assumes you have perishable or quickly outdated items, so you need to sell the oldest goods first. Also, if selling prices rise, this method will give you a lower cost of goods sold.

• Advantage: Makes bottom line look better to lenders and investors.
• Disadvantage: Higher profit results in higher taxes.

AVCO (Weighted Average Cost): Bases report on the average product cost and average selling price for the entire year.

• Advantage: Simpler to do, more accurately represents replacement costs.
• Disadvantage: Inaccurate when prices fluctuate severely up or down.

Benefits of Inventory Management

Now we get to the good stuff: how your accounting system can save money and help you make money, too.

1. Avoid cash flow problems. With stock levels properly tracked, you’ll never tie up too much cash in unneeded inventory. Use that cash to pay other expenses or improve your business.

2. Maximize sales. Know in advance when you’re running short of an item, so you’ll never have to turn customers away.

3. Reduce storage costs. Know which items are slow-selling, so you reorder less often or not at all.

4. Maximize write-offs. Know exactly how much you’re losing to damage, theft, and product expiration.

5. Get bulk discounts. Know what’s selling fast, so you can place larger orders at a lower cost per unit.

6. Get better marketing results. Use seasonal sales trends to build promotions.

7. Optimize profit margins. Fully tracked costs let you see how much you’re making and where adjustments could be made.

In short, the better your inventory management system, the more you’ll be empowered to take your business to the next level. If you have any questions about inventory accounting or valuation, please give us a call.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.