An explanation of the Cost of Goods sold for Mary Kay Consultants
Inventory is not expensed in the year purchased. It is expensed when sold. The
schedule C that you use to file your taxes has a place on page 2 for inventory
under "cost of goods sold". You will want to physically count your inventory at
the end/beginning of each year. The wholesale number is what you will put on
page 2 of your schedule C.
The Cost of goods sold section is really the most complicated, and yet, super
important section of your schedule C.
In that one section you account for your beginning and ending inventory figure,
account for personal use, products used for samples, products given away, and
non-recovered sales tax.
The record keeping is actually surprisingly easy but all of those factors are
automatically worked into this calculation when you keep good records.
Here's an example.
Let's say that at the beginning of the year you have $1000 wholesale on your
shelf.
During the year you purchase $5000 in wholesale product
You use $500 wholesale personally.
You give away $400 in free products
You used $450 in demo products.
Your sales were $8000 in retail products.
Your inventory at the end of the year was $650
If you look at the Cost of Goods sold section of your schedule C
Line 35 beginning inventory would be $1000
Line 36 is purchases - On this line you would add your purchases of $5000
minus the $500 of products you used personally. You would also add in the "non
recovered sales tax". Non recovered sales tax is the sales tax that you paid
when you bought the product for items you either gave away as hostess gifts or
items you used for demo. In this case you would add $400 for the free products
plus $450 for the demo items = $850 x 6% tax. Your non-recovered sales tax is
$51. So...purchases would be $5000-$500+$51 = $4551.
Lines 37-39 are all zero (any supplies you purchased would be deducted on
page 1 of the schedule C)
Line 40 you would add your beginning inventory to your purchases figure to
come up with $5551.
Line 41 is your ending inventory figure of $650.
So you COST of the goods sold would be 5551 - 650 or $4901.
Let's examine that cost - what does that include?
Well - you sold $8000 in product - so obviously $4000 of that is the cost of the
product you actually sold. The other $901 is a combination of the $400 of free
products you gave to hostesses, $450 in demo and $51 in non-recovered sales
tax.
See how that is worked in? When you are doing this calculation yourself it's
really important to check that "cost of goods sold" figure. It should be between
55 and 65% of the sales figure. In our example if we take the $4901 and divide it
by $8000 we get 61% - that's about where it should be.
The percentage can vary depending on how much you use for demos and how
much you give away to hostesses.
Probably WAY more information than you need. Hope it helps!
Tracie