![]() ![]() All the while, you may be somewhere in between, but you simply won’t know! Which brings me to… Accrual Basis Accounting While in months where you don’t make any inventory purchases you may feel that your business is insanely profitable. In months where you make large inventory purchases, cash basis accounting may make it look as if you lost money. However, the con of cash basis accounting is that you end up with terrible visibility into your actual profits. In your bookkeeping, you would expense this $10,000 right away. For example, say you pay a vendor $10,000 for 1,000 units of an item. The pro of cash basis accounting is that it is the simplest type of accounting. ![]() There are two ways to determine your COGS, and each have their pros and cons. Quick Tip: It’s important to understand that COGS is all about costs you incurred relevant to obtaining each piece of inventory and is not associated with overhead expenses for your business (such as office space rental, office supplies, or even shipping products to customers.) How to Calculate COGS And who doesn’t want a clear picture of your gross profit? This is important when it comes to making further business decisions, such as determining if you are pricing your SKUs high enough to turn a profit. When you calculate your sales for a given month and then subtract your COGS for a month you are left with your gross profit.
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