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Small Biz Accounting Tips, May 2014
April 29, 2014
Good Morning!

Welcome to your May newsletter on Small Biz Accounting Tips!

Well, it's spring. The birds are chirping, and storm clouds are passing thru. Funny how birds sing anyway, isn't it? They don't worry about storms, apparently.

Here in Ohio the ground is still soggy in places from all the snow we had this winter - a record for us - I think it ended up to be about 90 inches of snow. That's 3 times our normal snowfall. But it's spring now and it's time to start looking ahead.

Does your small biz make a profit on operations? What I mean is, are your sales high enough to cover your costs?

A big part of that answer is in your costs.

This month I'm going to talk about Cost of Goods Sold.

So let's get started!

-Kathy


Cost of Goods Sold

Cost of Goods Sold isn’t an account, per se, although it can be...it’s more a section in your Income Statement, sitting there between your Sales and your Expenses.

It’s a calculation of the direct costs of making your products (manufacturer)– or providing your services (service business) – or selling someone else’s products (retailer). For the service provider, the term is Cost of Sales, as there is no “goods” being sold.

So what is a direct cost?

It depends on what your business does, but here’s some examples.

Direct Costs for a Manufacturer:

*materials purchased to make products (including the cost to get it to you)
*wages paid for anyone who makes the products
*subcontracted services – having someone else do part of the process
*freight paid to get the product to the customer

Direct Costs for a Retailer:

*cost of products purchased for resale, including freight to get them to you
*wages for employees on the shop floor selling the goods
*freight charges if you deliver the goods or ship them to a customer

Direct Costs of a Service Provider:

*costs to get to the client – airfare, car rental
*hotel and meal costs if away from your home when providing services
*costs of presentation materials, copier costs, office supplies used, etc.
*wages of employees included in presentations or those providing the service (auditors, attorneys, laborers, etc.)







Journal Entries for Cost of Goods Sold

What kind of Journal Entries would you make for these kinds of costs?

First of all, Cost of Goods Sold is not usually used as an account in your Chart of Accounts. Usually you will find certain accounts listed as “Cost of Goods Sold accounts”, just like you’ll see certain accounts listed as “Sales accounts” or “Expense accounts” or “Asset accounts”, well, you get the idea.

Usually we use the following accounts in the Cost of Goods Sold section:

Materials
Products for Resale
Direct Labor
Subcontracted Services
Freight
Billable Expenses (travel, meals, office expenses, etc )

Here’s some sample Journal Entries:

Let’s say you manufacturer those shepherd hooks that you see in yards, holding flower pots or little garden flags.

You have to purchase steel rods.
Materials……………………….$5,000
Cash- Checking……………………………$5,000

Then, after you cut and bend them, you need someone to powder-coat them for you.
Subcontracted Services………$2,500
Cash-Checking……………………………………..$2,500

When they’re done, you have to ship them to the store that sells them for you.
Freight……………………..$500
Cash-Checking…………………………$500

Cost of Goods Sold on your Income Statement

Let’s continue with the example above, and say you sold the products for $10,000.

Here’s what you’d see on your Income Statement:
Sales…………………………………………………………………..$10,000

Cost of Goods Sold
-Materials……………………….$5,000
-Subcontract……………………$2,500
-Freight……………………………$..500
Total COGS………………………………………………………….$ 8,000

Operating Profit (aka Gross Margin)…………………….$ 2,000

--after this section, you’d list out your Expenses, and then calculate your Net Profit.

Operating Profit is what you’ve made from selling your product. Net Profit is the amount left after deducting all your other Expenses, like rent, utilities, advertising, phone, etc.

Talking about Cost of Goods Sold and Income Statements, I’m reminded that many small business owners don’t look at their Income Statement until the end of the year, when they’re doing their tax returns.

Really, you should at least prepare an Income Statement once a quarter. If you’re not earning enough Operating Profit to cover your Expenses, you need time to make adjustments.

You could either have a sale to boost Sales, or you could increase prices, or you could bump up your advertising to bring in more customers. But, if you don’t look at your Income Statement til the end of the year, how are you going to know?

Yes, your cash balance should be shrinking. You should have trouble paying your bills. But will you attribute that to low Profit Margin or will you just think it’s the ‘off season’ or the economy?

For more information on Income Statements, click the link here. Income Statement



Is your checkbook your accounting system?

If you use QuickBooks, preparing an Income Statement is as easy as a couple of clicks.

But if you’re just using your checkbook, it's a little harder. You may want to consider upgrading to a system I’ve created. It uses a simple Cash Receipts Journal and Cash Disbursements Journal to record your business activity each month.

These journals can be created on paper or in Microsoft Excel (or the free version), whatever works best for you. They need not be complicated or fussy.

But you can pack a lot of info into these journals, and get a lot more information that just a checkbook entry. And, from these journals it’s an easy couple of steps to an Income Statement.

For more info on this system, click here. manual acctg system


QuickBooks is on sale.



QuickBooks is a full accounting software system, and it's the #1 small business accounting software package on the market. I use it, so I know it has a lot of great qualities. You can invoice customers, pay bills, pay your employees, track your jobs or projects, and prepare all manner of reports. So if your business has outgrown your manual system, check it out.





Have any questions?

Feel free to send me an email. Use the link below.
Click here to send me an email.




Well, that's it for this months newsletter.

I'll be back next month with more news and tips to help you with your small business bookkeeping.

Take care!

Kathy http://www.small-business-accounting-info.com

PS: Please feel free to let your fellow small biz owners know about this newsletter! Send them to my sign up page - the last button on my navigation panel.

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