4 ms·

You could account for your inventory as an asset and then expense it once sold. That would make you much more profitable on paper right away! :)

cjbgkagh 4y ago
AKA Cost of Goods Sold (COGS)
- beambot 4y ago
  Not quite. Inventory is an asset on the balance sheet. It only becomes COGS on the income statement when the goods are sold.
  - cjbgkagh 4y ago
    I figured the idea of labeling the inventory as an asset was part of the practice of later deducting the cost (expensing). I.e. you can’t expense it twice.
    - rgbrenner 4y ago
      I think you're both saying the same thing... when you buy new inventory, the entries are: (subtract cash) (add to inventory assets) This is not an expense yet. Then later when you sell it: (subtract inventory) (add to cogs) COGS is an expense account. Since an income statement doesn't show assets, it wouldn't appear on the income statement until it becomes a COGS expense.
      - deleted 4y ago
        [deleted]
    - conductr 4y ago
      Yes basically because of matching. The income statement is sloppy without it and difficult to determine operating performance https://en.wikipedia.org/wiki/Matching_principle https://en.wikipedia.org/wiki/Matching_principle
rumblerock 4y ago
I'm assuming this was slightly in jest, but paying yourself is all about free cash flow when you're bootstrapped, fronting inventory and growing. And in practice, with hard goods this is really difficult unless your gross margins are really high.
skeeter2020 4y ago
If there's a single rule for small business it's "Cash is King". Cashflow is what kills you and the monthly income statement is way more important than your balance sheet.
- mediaman 4y ago
  This is actually why the balance sheet is more important than the income statement. The income statement can obfuscate what's happening to cash flow. A close study of the balance sheet reveals whether working capital is consuming retained earnings.
  - fsckboy 4y ago
    of course, you could always look at the third leg of the three legged stool, the cash flow statement.

cjbgkagh 4y ago

AKA Cost of Goods Sold (COGS)

beambot 4y ago
Not quite. Inventory is an asset on the balance sheet. It only becomes COGS on the income statement when the goods are sold.
- cjbgkagh 4y ago
  I figured the idea of labeling the inventory as an asset was part of the practice of later deducting the cost (expensing). I.e. you can’t expense it twice.
  - rgbrenner 4y ago
    I think you're both saying the same thing... when you buy new inventory, the entries are: (subtract cash) (add to inventory assets) This is not an expense yet. Then later when you sell it: (subtract inventory) (add to cogs) COGS is an expense account. Since an income statement doesn't show assets, it wouldn't appear on the income statement until it becomes a COGS expense.
    - deleted 4y ago
      [deleted]
  - conductr 4y ago
    Yes basically because of matching. The income statement is sloppy without it and difficult to determine operating performance https://en.wikipedia.org/wiki/Matching_principle https://en.wikipedia.org/wiki/Matching_principle

rumblerock 4y ago

I'm assuming this was slightly in jest, but paying yourself is all about free cash flow when you're bootstrapped, fronting inventory and growing. And in practice, with hard goods this is really difficult unless your gross margins are really high.

skeeter2020 4y ago

If there's a single rule for small business it's "Cash is King". Cashflow is what kills you and the monthly income statement is way more important than your balance sheet.

mediaman 4y ago
This is actually why the balance sheet is more important than the income statement. The income statement can obfuscate what's happening to cash flow. A close study of the balance sheet reveals whether working capital is consuming retained earnings.
- fsckboy 4y ago
  of course, you could always look at the third leg of the three legged stool, the cash flow statement.