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Need Some Deductions for 2012?

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10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2012

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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, for a retail business the following procedure is followed:

  1. Gross Sales:
    • Determine gross sales first.
  2. Net Sales:
    • From gross sales, deduct sales returns and allowances (if any) to arrive at net sales.
  3. Gross Profit:
    • From net sales, deduct cost of goods sold to arrive a gross profit.
  4. Net Income:
    • From gross profit, deduct all other business expenses, such as administrative and selling expenses, to arrive at net income.

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.

To determine cost of goods sold, a physical inventory is generally taken at the end of each year to determine.

Cost of goods sold if figured as follows:

  1. Beginning inventory, plus
  2. Net purchases, equals
  3. Goods available for sale, minus
  4. Ending inventory, equals
  5. 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 includes:

Net purchases equals:

Goods available for sale:

This is 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.

Next:

Income: Reporting Income for a Manufacturing Business; Cost of Goods Sold for a Manufacturing Business

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