J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Income from the Sale of Goods

Reporting income from the sale of goods involves a 2-step process. First you must figure your gross receipts—amounts received from sales (determined by your method of accounting). Then you must subtract from gross receipts your cost of goods sold.

Cost of goods sold

The cost of buying raw materials and producing finished goods. Essentially it is the cost of buying inventory or manufacturing inventory.

Cost of Goods Sold

Cost of goods sold (COGS) is determined each year by adjusting beginning inventory for changes made during the year. For Forms 1065, 1120, and 1120S, the cost of goods sold is figured on Form 1025-A (rather than on a schedule on the return).

Inventory at the beginning of the year (generally your closing inventory reported on last year’s return) is increased by adding any inventory purchases or manufactured items purchased that year. Include not only purchases but also the cost of labor and other costs required to be included under the uniform capitalization (UNICAP) rules explained in Chapter 4. Decrease this figure by sales from inventory.

To know what your opening inventory and closing inventory is, you need to take a physical inventory. A physical inventory must be taken at reasonable intervals and the actual count must be used to adjust the inventory figures you have been maintaining all along. Generally, a physical inventory is taken at year-end. You are permitted to estimate year-end inventory by factoring in a reasonable ...