how to find COGS for a cash basis business

Hello there,@DMD.

When setting up an inventory item, the system automatically add Cost of Goods Sold account to your Chart of Accounts.

The Cost of Good Sold (COGS) will only be realized when the item is being sold out. This account isn’t meant for the items you use to create your products, such as raw materials. You can double-click the amount to see the sales transactions. 

You can run the Profit and Loss report to show the COGS. Here's how:

1. On the Profit and Loss report, click the amount next to the Cost of Goods Sold account.
2. Click the entry to open it.
3. Go to the Reports tab, then click Transaction Journal.

I've added the Customize company and financial reports link to help you easily get a view of how well your business is doing.

If you have other questions or concerns, don't hesitate to leave a comment below. I'll be around to help.

Josem,  Thanks for the suggestion.

I don't see a "Cost of Goods Sold" account in the Chart of accounts.  I do see a "Cost of Goods Sold" account type.  That's the type assigned to the "Cost of Materials" account.

I ran the Profit & Loss, and double clicked on Cost of Materials.  This brought the "Transaction Detail By Account" report.  Then I clicked Customize Report.  I added a Transaction Type filter, "Credit Card".  The result, $2203, is that I can see nearly what I spent, $2330.  Actually there are more transaction types in this account, like Check, so I have to fiddle with Transaction Type/Multiple types to get it right.

The other method I used to find COGS is to 'Excel export' "Cost of Materials" to .csv.  Then in a spread sheet, I sorted on the amount column.  This put all the invoice amounts together at the bottom because they are negative.  Then I deleted all the invoice rows and summed amount.

But I still don't know if this is right for the tax.  The tax preparer said to take the year of end total, including the invoices.  I'm 90% sure the invoice transactions should not be counted.

Still I need to know what is correct for the schedule C Cost of Goods Sold.

P.S.

These materials are not part of my product.  They are part of my customer's product.  I buy them for him, and he reimburses me after I invoice him.  In the invoice, each item purchased is listed.  No mark up.

Thanks for coming back to the Community, DMD.

I appreciate you for sharing with us the steps you're performed to get the COGS and the amount.

Based on the information that was shared, yes, Cost of Materials with Cost of Goods Sold as the account type is the same one mentioned by my colleague. In regard to getting the amounts for the COGS, the Profit and Loss Report as suggested by @JoesemM will provide the information you need.

For your other concern, I recommend reaching out to the IRS. They can provide advice on how to handle the reporting of COGS for cash accounting especially for the materials that aren’t part of the product. This is to ensure that the information reported on Part 111 of the Schedule C Cost of Goods Sold is correct.

You can also bookmark this page for future reference. It contains general information about the federal tax laws that apply to small business owners who are sole proprietors or statutory employees: Publication 334.

For more information about the cash accounting method and its benefits, see the following article: Cash accounting: Cash accounting: How it works, advantages, and disadvantages.

Stay in touch if you need further assistance while working in QuickBooks. I’m here ready to help you. Have a great rest of the day.

Anybody else?

Thanks Teri,

"only amounts paid [by me] during the year" answers my question.  I can and have figured that, $2330.

My Profit and Loss by customer (there's just one customer) has a COGS of $757, which includes the amounts I invoiced my customer and my actual cash purchases.  So, I think I am doing something wrong in my accounting.

I will just file taxes with the correct, $2330 figure, and fix the accounting soon.  I will probably have an accountant look at my company file.  The tax advisor said I will using groups incorrectly, I will look into that more.

Hello, @DMD. 

Thanks for reaching back out to the Community. I'm glad that you were able to get some information that was helpful to your issue. Consulting with your accountant will allow you to receive the best accounting advice for your business. If you don't have an accountant, you can check out this link to find one near you. 

If you have any other questions, just press the Reply button below. Have a great day! 

@DMD -

I'm sure you just want to be done with this, but not sure you heard exactly what I said here, which was not:

"amounts paid by you" but was "amounts paid in CASH" which might exclude charges to credit card if you had not yet paid CC bill in CASH.  Cash is the key here.  Some tax people count as paid in cash, some not.

However, you did say a few things that sound not right. You said that your COGS on P&L by customer include amounts paid in cash by you and amounts billed to customer. That would be correct assuming

you are billing all COGS to customer, you would see same amounts in Revenue (Income at top of P&L)

that you see in COGS. The amount at the top then would be that cost plus profit added on top of cost. 

I agree that you should work with the person who does your taxes since they are actually looking at your QB where I am just responding based on what you have shared here. Your tax person should always be able to explain to you so that it make sense, or I suggest get a new tax person, seriously, there are many bad ones out there and I run into them all the time. Despite doing accounting forever, had two bad ones myself that I had to fire. 

Hi Teri,  Thanks for taking the time to read my last post.

So with "CASH" you literally mean paper money & coins?  Not credit card charges, not checks.  I rarely buy with paper money.

I see "Income" not "Revenue" almost at the top of Profit and loss.  It is a category of "Ordinary Income/Expense".  I'm using QuickBooks Premier 2014, desktop.

I don't track inventory.  Just one "item" years ago that I never use now.

I don't see Direct Cost in QuickBooks anywhere.  Perhaps that is a tax concept, not an accounting concept.

I am  confused.

Details:

Suppose I purchase a thing like a hose clamp at a hardware store with my business credit card.  That seems to me like a 'cost of goods sold'.  I had been thinking of the transaction as immediate from my credit card account to the vendor, and therefore like cash.

I later invoice that part to the customer, which will become 'Revenue' or gross sales (also including labor) when paid to me my my customer.  It confuses me that both the charge and the invoice (opposite sign) appear in the COGS, canceling each other.

The 1099MISC that I get includes both the labor and the parts reimbursement.  There, the parts are in no way cancelled out.  If all items were paid by the end of the year, the sum of COGS in QuickBooks would be zero which seems really wrong.

CASH meaning WHEN the money leaves your bank account, not how. 

Cash is paid on the spot with cash money (paper/coins) and for checks.

When you pay by CC, you may not pay that cash till next month or next year.

Bank = Cash in QB

Income = Revenue in QB.  Revenue is what most accounting systems use, sorry about that.  

Job = Project in QB.

Direct cost is definitely accounting term, not taxes. 

Direct cost are the amounts you spend on that one Job.

If you had two Jobs, each would have their own Direct cost.

Indirect cost would be shared by both jobs such as rent or utilities.

Income minus Direct Cost = Gross Profit

Gross Profit minus Expenses = Net Profit or Loss

So in QB where you are forced to see COGS regardless of inventory, COGS = Total Direct Cost.

Suppose I purchase a thing like a hose clamp at a hardware store with my business credit card.  That seems to me like a 'cost of goods sold'.  I had been thinking of the transaction as immediate from my credit card account to the vendor, and therefore like cash.

Yes, this is COGS aka Direct Cost.  Cash is not paid until you pay credit card statement.

I later invoice that part to the customer, which will become 'Revenue' or gross sales (also including labor) when paid to me my my customer.  It confuses me that both the charge and the invoice (opposite sign) appear in the COGS, canceling each other.

Yes, that definitely seems wrong.  Sounds like you have Revenue/Income connected to COGS account.

The 1099MISC that I get includes both the labor and the parts reimbursement.  There, the parts are in no way cancelled out.  If all items were paid by the end of the year, the sum of COGS in QuickBooks would be zero which seems really wrong.

Yes, this is not great since you are likely paying payroll taxes on those parts. 

SE Taxes are 15.3% before you even get to Federal and State Income Taxes.

Yes, COGS should never be zero or negative, so something is not setup right for sure.

Teri, Thanks again for your detailed answer.

I had been thinking of the credit card account as 'my' account.  Perhaps I should think of it as the bank's account.  It would seem difficult to ever track COGS based on payments to the bank, even if (as usual) I pay off the whole balance of my credit card.  The credit card charges include expenses like printer paper as well as parts like hose clamps.

I created a new hypothetical company to see if I could reproduce my problem(s).  In particular, do both the credit card charges (keeping that as cash for the moment) and the invoice amounts show up, and cancel each other, in COGS.  They do not, until I record a payment from the customer and deposit it to checking.  Then, COGS (in profit and loss) goes from the item costs, $58 to $0.  Same if make another purchase with a check.  So the problem seems duplicated.

I tried to upload the .QBB file of this new company, but the forum will not allow that file type!?

@DMD - Part 1 - Expenses

When you post CC entries, those entries should be:

- Debit Expense accounts (Direct or Indirect)

- Credit CC Liability account

This puts the expense on P&L and liability on Balance sheet as amounts owed to CC but not paid yet.

When you pay credit card, those entries should be:

- Debit CC Liability account (to zero it out)

- Credit Cash account

This clears the liability and pays the CC balance.  This entry often occurs in the next month/next year.

You can see these entries, the debits and credits to these accounts best on your Trial Balance report

and you can see the detail in General Ledger report and if you click transaction icon at top of entry.

@DMD - Part 2 R&B (Revenue & Billing)

In QB, when you create invoice for customer is when the revenue entry is created. Those entries are:

Debit A/R (Accounts receivable) account on Balance sheet (pending payment)

Credit Revenue (Income on QB) account on Income statement (P&L on QB) 

When Payment is received from customer, the entries should:

Debit Cash (QB Bank) account

Credit A/R account (to zero out)

If your customer payment is somehow hitting COGS account, that is what is messing you up.

There is a weird setting in QB called "Reimbursable," used for example if you had travel expenses for a customer, you could set this so that when you record customer payment, it actually zeros out expenses.

I don't know why anyone would ever want to do this, make no sense at all to me, because you want to see

your revenue and expenses not have them disappear.  I suspect you may have the setting turned on since you are seeing customer payment wipe out your expenses.  Should be under company preferences.

Hi Teri,

I couldn't find the Reimbursable setting anywhere.

Perhaps you mean (in previous message):

-----------------

When you pay credit card, those entries should be:

- Debit CC Liability account (to zero it out)

- Debit (not Credit) Cash account

------------------

I found in my little hypothetical company that the Profit/Loss report shows net profit for the company on the Sales Income line, $247.50. See "H2 accounts(4).png" the blue oval. This is where I would have expected gross sales, same figure as my 1099-MISC.

More on the hypothetical company:

"H2 accounts(1).png", parts and materials 'report' a COGS type account

A summary of transactions:

   Purchases: 13, 45, 75.25 (I don't mark up, so there is no profit here, seems like it should be COGS to me)

   Labor: :45, 3:45 = 4.5 hours * $55/hour = $247.50 (this is where all the profit is)

   Payments: 305.50, 75.25

Somehow "H2 accounts(4).png" did not upload.

---

@DMD 

Hi Teri,

I couldn't find the Reimbursable setting anywhere.

Do a search here for "reimbursable" there was a recent discussion.

 

Perhaps you mean (in previous message):

-----------------

When you pay credit card, those entries should be:

- Debit CC Liability account (to zero it out)

- Debit (not Credit) Cash account

 

No, I meant exactly as I said, normal accounting is:

Debit to Cash = Money added to your bank account

Credit to Cash = Money paid out of your bank account

 

Every entry has a debit to one account and credit to another.

QB hides words debit and credit since non-accountants don't like.

 

On example, left looks like CC account and on the right looks like bank account.

You are looking at an old time checkbook register.  No Debit or Credit columns.

 

Cash account on the right is an Asset account, which preferably always has a Debit balance.  

CC account on the left is a Liability account, which should always be zero or Credit balance.

 

You will notice each of those here has a column called "Payment" that is on the  opposite side.

Red arrow looks like your are moving $58 from CC account to bank account so not sure why.

------------------

I found in my little hypothetical company that the Profit/Loss report shows net profit for the company on the Sales Income line, $247.50. See "H2 accounts(4).png" the blue oval. This is

where I would have expected gross sales, same figure as my 1099-MISC.

 

Yes, that top line on P&L should be sales/revenue/income = money paid by customer.

 

More on the hypothetical company:

"H2 accounts(1).png", parts and materials 'report' a COGS type account

A summary of transactions:

   Purchases: 13, 45, 75.25 (I don't mark up, so there is no profit here, seems like COGS to me:

 

Agree the above sounds like COS to me.  Direct labor below s/b also in COS in red box.

 

   Labor: :45, 3:45 = 4.5 hours * $55/hour = $247.50 (this is where all the profit is)

 

   Payments: 305.50, 75.25   Not sure what these are

 

I suggest you need to get some basic accounting training.

---

Compare using a two-sided pass through item to NOT doing so.  In this case I just use the 'parts purchase' expense account for every purchase.  No item.  The COGS account then gets decreased for each invoice that has a part.  The COGS account then behaves like some ledger account that tends to a zero balance.  Wrong!

Please see "with no pass-thru.png"

@DMD 

COGS s/b total cost you spent on Job including your labor cost.  Should never be zero.

Teri,

I agree.

Eric