In my last Cash Flow Accounting post, I talked about the two common bases for accounting: cash and accrual. There is actually one more basis. This is the one that retail businesses need to use.
Retail businesses must use the hybrid basis of accounting. With this basis of accounting, the cost of inventory is an asset and so is not immediately deductible.
There is a common misconception that if you pay money for your business, you get the deduction if you’re on the cash basis. But the one difference is for inventory. Even though you pay cash for the inventory, it’s not immediately deductible.
Tracking inventory can be a little more difficult for the small business. Ideally, you have every item costed out and when it sells, it is immediately recorded out of inventory and moved to cost of goods sold (an expense). But unless you have a Point of Sale (POS) system that automatically does that calculation, chances are you’ll need to regularly calculate your physical inventory. Your bookkeeper can then adjust your inventory and cost of goods amounts.
If you need help finding the best accounting methods, making adjustments or are just looking for a reliable and affordable bookkeeping resource, give us a call. Our friendly Cash Flow Accountants are all degreed accountants with experience working with businesses just like yours. You can call Richard at 888-592-4769 to find out more about how affordable we can be.