Common Mistakes When Booking Cost Of Goods Sold

There are very few things that can impact a company's tax return as significantly as their cost of goods sold. The cost of goods sold for a business forms the cost basis of the company's expenses; it will be directly deducted from the company's income. The company is not required to pay taxes on the amount of their income that was directly related to cost -- consequently, it's very important that everything be booked properly.

Not Properly Booking the Inventory Items

Many bookkeeping systems automatically calculate cost of goods sold based on inventory. This is because the cost of goods sold may not be officially booked until the item itself is sold -- this is how it will usually work in accrual accounting versus cash accounting. When inventory items are not properly booked with the actual cost of each item, the cost of goods sold may not be accurate. The inventory should be audited at the beginning and end of the year to ensure that cost has been booked properly.

Not Deducting for Items Removed

Any items that were removed from the company's inventory for personal reasons cannot be considered a cost of goods sold. For small businesses in particular, this can become problematic; business owners can frequently remove inventory as they need it. There is nothing wrong with removing inventory as long as it's removed from the books when it occurs. Careful record keeping will avoid any issues that would come up in an audit. This also includes items that may be given to employees.

Not Remembering Materials and Supplies

It's easy to remember the cost of retail items that are purchased wholesale and then resold. It can be more difficult to remember items that may have been necessary to produce those items. As an example, glue or other materials needed during the manufacture of items would still be a cost of goods. A "cost of goods" is anything that is required to materially make the goods that are being sold.

A tax accountant can help you ensure that your cost of goods is accurate -- but only to a certain extent. Your records still need to be current and accurate for your tax accountant to properly review it and ensure that things are booked as they should be. When in doubt, you should keep as many records as possible, especially when it comes to your inventory purchasing and sales. For more information, check out a site like