Inventory Tracking

[Taxman]

Question for those who have monthly accounting clients who have inventory items and collect state sales tax. Do you track each piece of inventory that comes in/out or do you just add it to purchases and at the end of the quarter or year-end do an inventory count to come up with your ending inventory and make any adjustments. How does reporting of state sales tax effect the way you handle inventory? Most of my clients don't collect sales tax or have inventory but I just obtained a new client who has both and want to make sure I'm covering all my bases. Thanks

[BOB W]

I guess it could depend on the type of business and how safisticated (?) their operation is. The run of the mill Mom/Pop retail store is the most common so let me start by saying, Good Luck in having them do an inventory.

I keep track of all purchases for the year, add begining inventory and subtract ending inventory to get to cost of goods sold. The trick here is coming up with a figure for ending inventory. The best is to take a count, at cost, of each item in the store on a day closest to the end of the year. I'm not going to get into making adjustments for sales after the year ended or purchases included in inventory that came after the year ended. Surfice it to say, taking a physical inventory can be very time consuming and making adjustment to that figure can be overwhelming at times.

If your accounting methods are good you should be backing out of sales the sales tax figure and posting it to "Sales Tax Payable" account. This will keep your sales as sales.

[sea-tax]

I have to second Bob's opinion. With the Mom and Pops it is next to impossible to get them to do it more than once a year. I handle it a lot like Bob W.

[Taxman]

I'm sure 99% of mom & pop businesses don't bother with inventory. I guess I'm over thinking it when it comes to the sales tax issue. If they purchase 100 items tax free from their supplier and we just record it as a lump sum purchase and at the end of the year do an estimate of inventory to come up with an ending inventory balance to figure the cost of goods sold and record sales tax returns based on sales mom & pop book, couldn't the state tax dept come in an do an audit and nail them for not having sufficent records to account for the movement of inventory?

[sea-tax]

TaxMan
I am in State of Wa and have been involved with at least 30 DOR audits.
Generally they look for :
1) Did you report correct income and if so collect correct tax %
2) Did you buy equipment and if so did you pay use or sales tax
3) did you buy supplies and office expenses and if so did you pay sales tax.
They will generally take a sampling of reciepts and if all looks good stop there .I guess they figure that for most ma&pops they don't buy enough for it to be fruitful
4) if the client has taxable and non-taxable sales did they pickup the correct amount of each. Say like in a gas station where you sell both taxable and non-taxable the WA DOR says the % should be like 75%taxable and 25% nontaxable generally speaking.

This is for my state maybe yours is differnent. Hope this helps.

[veritas]

We do bookkeeping for several convenience stores. The preferred method of tracking inventory is using the retail method. Most hire a service to come in on a regular basis to take inventory. If the store owner is serious about tracking their inventory they should do this.

[Taxman]

Thanks

I'm in Florida and just starting out so I want to make sure I'm going about it the right way. I guess my concern is that if the taxpayer purchases inventory tax free to resell but then takes some of the inventory home for personal use and doesn't report it on the sales tax return how detail of an audit is peformed for sales tax.

[BOB W]

Proper Records

Without proper daily store records auditors will apply their own educated guess and it will be up to you to prove them wrong. With proper records they have to prove you wrong.

Personal use of store inventory many times goes unnoticed, but it depends on the type of business. They should be backed out of purchases and recorded as a withdrawal/net profit distribution (at cost + sale tax) plus, sales tax payable should be charged for the sales tax.

If you tell us what type of business it is and the approx annual sales we may better zero in with more than general replies.

[sea-tax]

I'm in Florida and just starting out so I want to make sure I'm going about it the right way. I guess my concern is that if the taxpayer purchases inventory tax free to resell but then takes some of the inventory home for personal use and doesn't report it on the sales tax return how detail of an audit is peformed for sales tax.

This can be a stickey situation and I have run across it once or twice. Our auditors out here don't look to close for it unless it is a substantial amount and done frequently.
I have seen other prepares pick what I can only assume is an arbitary amount and include it in the sales tax reports monthly. Is it 100% the right thing -no. But if the client will not keep track then you have to make do. I have one restaurant that reports 100$ per month in personal use items and has done this since before I was the preparer. I asked him once about it and he said some months I take nothing other months I take 75 or 100. He refuses to keep track so what are we to do. Every month when he sends in his sales he has 100$ personal use so we include that in the sales tax report.
I guess the logic is at least they have reported something.

[Taxman]

The client manufactures furniture and sells it to the public. He goes to the lumber store buys the wood and then turns it into a table, chair, entertainment center etc. It would be pretty time consuming for him to keep track of each piece of wood he buys and uses. He has invoices for all the wood he purchases but just gives the customer an invoice for the finished product. There is no job sheet which shows how much wood he used for a particular job. Do you think it would be a good idea if he kept a job sheet per project? I know it would be good for him to figure his gross margin per project.

[BOB W]

Wow

.... I don't have much time to respond tonight but> your client has 3 types of inventory.

1> Raw materials 2> Goods in process 3> Finished Goods.

If this furniture is cutom made then the materials will vary and each piece needs to be cost controlled and assigned a total cost. If it is standard repetitive construction then each item needs to be costed out once covering ALL materials, nails, glue, fabric and any other items used to put the item together and be ready for sale. You didn't mention their gross sales, which will effect his "tax return" cost of sales. Things like labor and overhead that needs to be assigned to the cost of "Goods in process" and "Finish Goods".

With the above said, each item sold has to have its cost associated with that item's sale. So an end of the year inventory is only to determine by 1, 2 and 3 above and does not become part of the calculation to develope your cost of goods sold, technically.

Sorry but I have a 3 day EA/CPA/IRS seminar to go to tomorrow morning and it is getting late.

Good luck with this new client. I would get out your old cost accounting books and read up on inventory.

[Joe Btfsplk]

Inventory

If you use Peachtree accounting, it has an inventory module which maintains a perpetual inventory, reducing inventory at cost (average cost or FIFO, based on your preference).
Unless you use such a program which picks up items as purchased and subtracts them when sold, you should use the physical inventory method. Charge everything to Inventory and make an adjustment for the reduction due to sales, breakage, etc. for the decline in the value of the inventory.

As to sales tax, when I worked for the State Comptroller, we looked at invoices to see if tax was being charged unless there was a resale certificate or exemption certificate. This might not catch a person who charged the tax, but failed to report it--once I found a single invoice with more tax than the guy had reported for the entire month. We also looked at purchases to see if they purchased taxable items that were not for resale.

From your client's standpoint, he should record the taxable sales to a separate sales account from non-taxable sales. An alternative would be to keep up with tax collected & divide sales tax by the sales tax rate to inflate it to the taxable sales; e.g. if the tax rate were 5% and you collected $600.00 in tax (600/.05)= $12,000 Proof: 12,000 X .05 = $600

[Taxman]

Thanks

Joe for the helpful post.

[Matt Sova]

Inventory software

For those clients that use QuickBooks there is a great inventory software called Business Aviator that will do assemblies from raw materials, track multiple locations and the transfers between them, keep the inventory by FIFO, LIFO or Avg Cost and handle many other inventory issues.

The website is businessaviator.com. How do I know that this is a powerful inventory solution? I advised the developers of it.

Matt

[Unregistered]

Unless you use such a program which picks up items as purchased and subtracts them when sold, you should use the physical inventory method. Charge everything to Inventory and make an adjustment for the reduction due to sales, breakage, etc. for the decline in the value of the inventory.

You should always have an annual physical inventory regardless of the software you use.