What happens to previously entered cost of goods sold transactions when I start tracking inventory?
If you started using Seller Ledger before we introduced inventory tracking, then there's a good chance you categorized inventory purchases using the "Cost of Goods Sold" category. This is sometimes referred to a "cash-based" inventory/cost of goods tracking, and if often debated as a legitimate option because you've effectively been writing off inventory purchases when you make them.
This being said, if you do decide to start tracking inventory in Seller Ledger, there are 2 thinsg that will change:
- First, we will go back and re-categorize prior "Cost of Goods Sold" transaction to be "Inventory" purchases. This simply moves those transaction from an expense category to an asset account.
- Second, you will no longer be able to categorize purchases directly as "Cost of Goods Sold" - this category will be removed from the drop-down lists.
While these changes may seem substantial, they are in reality pretty minor. To illustrate, let's look at an example:
Let's say you started using Seller Ledger in early 2023, connected your online sales channels, bank and credit card accounts. Now, assume you had categorized $650 in "Cost of Goods Sold" transactions so far for the year. Looking at your Tax report, a close facsimile to the Schedule C, you'd see that Line 4 shows $650.
For those of you who have ever looked closely at the Schedule C tax form, you may have noticed Part III:
You might notice that Cost of goods sold is actually a calculated value. The simple version of this calculation is represented like this:
Cost of Goods Sold (COGS) = Beginning balance + Purchases - Ending balance
If you were to try filling out this section, you would have to back into one or more of the other values - most commonly, line 36 (Purchases.) You could enter $0.00 balances for beginning and ending inventory and end up with an updated calculation like:
COGS($650) = Beginning balance($0) + Purchases - Ending balance($0)
Well, the only way that formula works is to enter a "Purchases" total of $650.
So what changes?
At this point, you might have an idea of where we're going. As mentioned earlier, we will re-categorize your previously categorized "Cost of Goods Sold" transactions as purchase that are reflected in a new "Inventory" account that will be visible on your dashboard, along with a new Inventory tab. In fact, if you click into your new Inventory account, you will see the following:
Look a bit familiar? The only change is that the $650 in purchases have moved from one bucket to another. You may notice that the "Current Balance" shows $650. This is because no cost of goods sold has yet been entered, giving a formula that looks like this:
COGS ($0) = Beginning balance($0) + Purchases($650) - Ending balance($650)
You can choose how you want to handle cost of goods, but if you were to simply record a single end of year entry of $650 (using the "Record cost of goods sold"), you would end up with the exact same formula as before the change:
COGS($650) = Beginning balance($0) + Purchases($650) - Ending balance($0)
And your Tax report will be filled out correctly. However, this change gives you significantly more flexibility. Not only does it allow to track how much inventory actually sold, but you can start to measure profit on each order and item sold.