Running a business involves the careful management of countless moving parts at the same time. Managing those disparate parts is made easier when equipped with the right knowledge and tools. At Ignite Spot, we love talking about all things accounting. While that might make us a terrible dinner guest, it also makes us a great source of information for improving your business acumen.
One of the most dreaded and simultaneously the most important times of the year is tax season. This is even truer for businesses who need to make sure they have properly accounted for all financial transactions throughout the year. One of the biggest players when determining total taxable revenue for the year is the COGS calculation.
What is the COGS Formula?
The cost of goods sold (COGS) is a required calculation for your business tax returns which will directly impact the business’ reported revenue and, therefore, the taxes due that year.
The COGS formula is: COGS = Beginning Inventory + Purchases - Ending Inventory• Beginning inventory is the value of all your inventory at the start of the fiscal year. You add this value to any purchases you make throughout the year.
• Purchases are any additions to your inventory you made during the past fiscal year. The total value of beginning inventory plus purchases made is then subtracted by your ending inventory.
• Ending inventory is the remaining value of your inventory at the end of the fiscal year. The result of this calculation is the cost of goods sold (also called cost of sales).
COGS is necessary for tax purposes to ensure your company reports its revenue accurately, but it can also be an invaluable metric for measuring the company’s profitability.
It’s important to understand that COGS only factors in costs that directly relate to the expenses involved in obtaining or creating the products that are sold during that fiscal year. All costs relating to production are fair game for the COGS calculation, such as the cost of raw materials, labor costs, and manufacturing overhead. Other costs that can factor into the calculation are shipping, costs associated with storing or warehousing products or materials, and equipment used for the administration of production.
Final Thoughts on COGS
Taxes and accounting aren’t everyone’s favorite subject (or so we’re told), but at Ignite Spot we have all the tools and expertise necessary to ensure your company makes the most of its financial resources. If you need help figuring out your COGS calculation or with any other aspect of tax filing, we are the partner for you. We offer outsourced accounting services, running the gamut from our virtual CFO service to tax preparation and everything in between. Contact us today to learn more.