Reporting Income for a Retail Business

Reporting income for a retail business is a bit more involved than for a service business.

For a service business, you simply determine gross receipts then subtract business expenses from gross receipts to arrive at net income.

However, since a retail business carries inventory, an additional element of complexity is added that a service business does not have to deal with.

The following steps are typically performed to arrive at net income or loss for a retail business.

  1. Deterne gross sales first
  2. Subtract from gross sales, sales returns and allowances, if any, to arrive at net sales
  3. Subtract from net sales the cost of goods sold to arrive at gross profit
  4. Subtract from gross profit all other business expenses to arrive at net income or loss

Cost of Goods Sold for a Merchandise Business

A merchandise business purchases items for resale. To make a profit, the cost of all items purchased by the business must be marked up to arrive at a selling price. The selling price of all items sold for the year must provide a sufficient gross margin to cover the cost of the items sold, plus overhead, plus a profit.

For example, if unit A is purchased for $10 and marked up 50%, the selling price would be $15 ($10 plus (50% x $10)). When unit A is sold for the $15, the $15 is called Gross Sales. Of the $15, $10 represents the cost of goods sold.

Cost of goods sold if figured as follows:

  • Beginning Inventory, plus
  • Net Purchases (purchases minus purchase returns), equals
  • Cost of Goods Available for Sale, minus
  • Ending Inventory, equals
  • Cost of Goods Sold

Beginning inventory:

Beginning inventory cost should match the ending inventory cost of the prior year. If your business is less than one year old, then your beginning inventory is zero.

Net purchases equals:

  • The total invoice cost for all items purchased, including shipping costs, installation costs, taxes, etc. minus
  • Purchase discounts and purchase returns

Cost of goods available for sale:

This is the beginning inventory plus net purchases for the year.

Ending inventory:

This is generally determined by taking a physical count of goods on hand at the end of the year. Each item on hand is assigned a value in order to determine the dollar amount of the inventory on hand.

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