By Deanna Parmenter

This blog is the second of four in a series talking about basic accounting concepts that I frequently get asked about.  By understanding these concepts, you may be able to reduce your taxes and eliminate some of the work (and fees) done by your CPA at tax time.  The scope of this article focuses on retail establishments, but many of the ideas will apply to other businesses as well.

Inventory is defined as items of tangible (things you can see and touch) personal property that are held for sale, partially completed items being produced for sale, or material used to produce products for sale.  In most cases, you record as inventory items that you possess, such as:

• Office supplies you purchased at Office Depot or Office Max
• Merchandise for sale at your retail store
• The meat, vegetables, and bread dough at your local Subway or Panini store

Only items that you own should be included.  For example, let’s say you own a consignment clothing shop (some examples in the Cy-Fair area are Angel’s Attic, Rosehill Resale, or Once Upon a Child).  The clothing or other goods you hold on consignment for your consignors should not be included in inventory.  Why?  Because you don’t own the goods  - the consignors do.

I know what you are thinking.  “That’s great to know what inventory is, but how do I record it in my Quickbooks or other accounting software, and for what amount?”

The most common way to record inventory is to record what it cost you.  The cost of an inventory item is the cash price paid or the fair value of something given in exchange for it.  

A trade or cash discount is a deduction from the list or catalog price of merchandise to arrive at the price you pay for the item.  For example, let’s say you own a Children’s Place store and you buy clothing from the wholesaler with a list price of $20,000.  You receive a 10% discount on your order because of the amount of purchases you make during the year.  You would record your inventory at $18,000 as follows:

                                List price……………………………………………………………  $20,000

                                Less:  Trade discount of 10%..............................           (2,000)

                                Cost of the merchandise…………………………………..      $18,000

Your CPA will do the necessary calculations to estimate the inventory value for your quarterly or annual records.  To help him or her, you should keep track of:

• Purchases you made, both at cost and retail
• Any additional markups or markdowns
• Sales for the period

Coming up in the next article in this series:  Why bank reconciliations are so important to your financial health and tips on how to do them quickly.