The cost of sales is ... Calculation of cost of sales
If you are engaged in the production or resale of certain goods, then for you the cost of sales is one of the most important of a particular product. To calculate this cost, you need to determine the price of inventories present at the beginning and end of the tax year.
Who needs it?
Cost of sales is an important indicator for those people who are engaged in wholesale or retail trade, direct production or business activities associated with the purchase or sale of goods for profit. Thus, this concept in no way refers to people engaged in entrepreneurial activities in the field of personal services, including lawyers, doctors, painters or carpenters, if they do not trade in various supplies or materials.
How to make calculations?
Cost of sales is the result of detailed calculations for a certain period of time. In order to determine it, you need to know the following indicators:
- The price of inventory present at the beginning of the year. In the event that it differs from the price of inventories present at the end of the previous year, you should attach a detailed explanation.
- The cost of all kinds of purchases are excluded from those goods that were taken by you for personal use.
- The costs that have been allocated for the remuneration of employees. You should also exclude any amounts allocated only for yourself.
- The price of materials, as well as all the necessary supplies.
- All other costs.
Having determined all these parameters, you can calculate the cost of sales. These are the most important indicators that should be present in your reporting.
To calculate, you need to add up all these characteristics, as well as determine the value of the inventory present at the end of the year. It is enough to subtract from the cost of inventories present at the end of the year, the sum of all the above indicators - and you will be able to determine the cost of sales.
Price inventory at the beginning of the year
If you are working in the field of trade, then the price of your initial stocks will be the value of all the goods that you have at the beginning of the year and that you are going to sell to buyers. In the event that you are engaged in production, then for you this indicator will represent the total cost of various semi-finished products, raw materials, finished products and any supplies you need in the production process.
The initial inventory is in most cases absolutely identical to those that were present at the end of the previous year, but if you have discrepancies in these indicators, you should determine their reason in the form attached to your tax return.
In the event that your company donates its own goods to charity, you can deduct from the taxable base either the fair market value of all the donated products or their base - it all depends on which indicator is lower.The base of the donated goods is all sorts of expenses on stocks that you have incurred in previous years and which you would otherwise have to include in the price of the initial inventory for this year. You will need to subtract the price of all the donated products from the value of the initial inventory, as it is not part of the cost of goods sold.
In the event that the value of all donated items was not included in the price of the initial stocks, the base of the donated products is zero, and you do not have the right to deduct this donation from the taxable base. In this case, the cost of such products is posted using the standard accounting method.
You are a taxpayer who uses a standard calendar tax year, as well as accrual technology. In 2015, you decided to donate property to a certain church, whose fair market value is 600 euros. According to the rules, in the price of final inventory for 2014, you included expenses for the purchase of this property in the amount of 400 euros,and in the same year you deducted from the taxable base administrative and other costs in the amount of 50 euros, related to this property. These costs you spent as expenses related to business activities.
For 2015, you can deduct from the taxable base this donation only in the amount of 400 euros, since 200 euros represents the amount that could make your regular income if you had sold the property at fair market price. The cost of goods sold, which is based on your calculations of gross income, will not have to include these 400 euros, so you can deduct them from the total price of the initial inventory for this year.
Deduction of goods that were taken for personal use
If your main activity is trading, you will need to deduct the cost of all the goods you have purchased for sale. In the case of production activities, it will be necessary to take into account the full cost of raw materials, parts or components required for the production of your final product.
The difference between the price published initially and the actual cost of production paid by the buyer when it was purchased is called the discount on the sale price. When calculating the cost of purchased products, you need to use not initially published, but precisely those prices that were actually paid. Accounting for cost of sales provides no indication of the amount of discounts as a separate gross income item.
Thus, a dealer who sells cars, calculating the cost of sold cars, must initially deduct any factory discounts from it.
What are the discounts for cash purchases?
Discount for instant payment when buying for cash is the amount that the supplier allows you to deduct from the bill for the purchased products, use it as a reward for instant payment.
Calculating the cost of sales of a service or goods, you can record these discounts with one of the following accounting technologies:
- write them on credit at a certain discount account;
- deduct them from the total amount of acquisitions for the given year.
Regardless of which method you use, you must do everything consistently and systematically.
If such discounts will be recorded in a separate account credit, you will need to indicate the credit balance in the amount of total business income at the end of the tax year. It should be noted that the use of this method does not provide for the deduction of discounts from the cost of goods sold.
Withdrawal from sales
If certain goods are removed from sales for personal use or for the needs of their families, their value must be deducted from the total price of the goods you purchased for sale. To do this, when the cost of sales will be calculated, the invoice must contain the value of these goods on credit for sales or purchases, and this amount must be withdrawn from your expense account.
The latter is a separate account designed to keep track of business income, which is withdrawn to pay for any personal expenses of the entrepreneur or his family.
In the majority of cases,when the cost of sales is calculated, the calculation of labor costs is considered as a separate element of the cost of sales only in enterprises engaged in the mining or manufacturing industry. Small trading companies often do not have their own costs of labor, providing for the possibility of attributing them to the cost of goods sold. In the companies engaged in the manufacturing industry, any costs for labor payment necessarily include not only direct, but also indirect costs necessary for processing raw materials into finished products.
Remuneration of production employees
When the cost of sales is calculated (the calculation formula was specified above), this article includes the salary of all employees who were employed in a particular production of a given product during the full working day. It is worth noting that this category also includes the salaries of employees working part-time if you have the opportunity to calculate this component of their salaries.
Other costs associated with pay
These costs need to be deducted from the compiled taxable base as administrative or trade expenses, since it is impossible to calculate the cost of sales according to the rules with the inclusion of these costs. The only type of labor costs, which in accordance with the rules can be taken into account when calculating the cost of goods sold, is the remuneration of auxiliary and production employees, as well as various labor costs considered as overhead costs.
Materials and supplies
All sorts of materials and supplies, including various chemicals and components required for the production of a product, must be recorded when the cost of sales is calculated. Chemicals and parts that are not used for production are posted as deferred expenses deductible from the taxable base as standard business expenses (depending on the use of these materials).