posted on December 28, 2000 03:50:05 AM new
Hi all -
I have a meeting planned with the family accountant, but I'm still looking for tips. The tax books I read say that if you have an inventory, you need to do accrual accounting.
Questions: do you do this? Do we have to know and record the value of any inventory we carry over from one year to the next? Or does this rule simply mean we do our accounting differently?
From what I can gather, in the accrual method you don't record the price you paid for inventory stock until you actually sell it. ?? I've been recording it as a "debit" as soon as I buy the stuff.
posted on December 28, 2000 04:15:41 AM new
Keziak, it is rather doubtful you are using an accrual method.
In a cash accounting system, you record your purchases (cost of goods) as you acquire them.
But this is where the old bugaboo "inventory" rears his ugly head. At the end of the year you must inventory your stock on hand, and that figure is eventually deducted from your purchases.
Comprendé?
In an accrual system, everything is "accrued"....paid or not(accounts payable), as well as received or not (accounts receivable).
Most likely you are operating on a cash accounting system, so you will need to do an inventory of your remaining stock, and what you paid for it. (And this isn't to say that an accrual system doesn't demand an inventory, before someone misunderstands.)
If this is confusing, post again, and I'll try to do better. It's only 6 something here...got up at 5 to work on listings.
posted on December 28, 2000 05:37:46 AM new
gc2: yes, I know for sure I am doing it the cash accounting way, but when I read that if you have inventory you need to do it by the accrual method, I start to seize up.
I used Free Listing Day to list all of my inventory. If it doesn't sell this week, it's out the door. so I'll have maybe a handful of books still lying around, and I could easily give them a value. I'm just not sure what to do with that figure.
Say it's $10. Do I add that to my "income" or "asset" column...in effect ending up paying taxes on it?
posted on December 28, 2000 06:06:59 AM new
Your accountant is the person to get advice from.
If you have inventory, you must use the Accrual Method unless you have written permission from the IRS. Here is a clip from the IRS tax law FAQ's:
"Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. However, if an inventory is necessary to account for your income, you must use an accrual method of accounting for sales and purchases. "
Inventory is defined as items purchased prior to being sold. In other words, if you only sell items that are drop-shipped from your distributor (like SMC, etc) you do not have inventory and can use cash accounting for your inventory purchases and sales.
If you can successfully convince the IRS that you never have inventory left over at the end of your fiscal year, you may be able to get permission to file your tax return based on Cash Accounting methods.
Provided you have no inventory, no accounts payable, and no accounts receivable at the end of the year; both systems will produce the same figures and results.
The differences in taxable income result when you have money owed to you or due to others. For example, at the end of the year we have a lot of businesses that buy computers from us in the last couple weeks of the year to write them off as capital expenses. We buy the parts on credit and bill the customer net 30. We have to pay tax on the profits in the current tax year, even though we will not collect our money or pay for the parts until January. (next year)
The main purpose of requiring businesses with inventory to use accrual vs. cash accounting is to prevent them from buying large quantities of merchandise with their profits and avoiding taxes until the next year. With cash accounting, a business could continue to build their inventory each year and never pay taxes. (with cash accounting, inventory is charged as an expense when it is purchased and deducted from the income whether it is sold or not)
But as I mentioned earlier...talk to your accountant, they will know.
posted on December 28, 2000 06:38:58 AM new
Mr Jim - thanks! Yes, I hope the accountant will have answers...I'm just worried that the answers will mean that recordkeeping will become such a nightmare that I won't want to do this anymore. That would be a shame.
Even if I don't keep any inventory over for next year, I will still have people owing me money for auctions that closed this month. I don't record this money until I have check in hand, but maybe that's not right either?
