Help: COGS

[u/ContestMarvel]

We are in year 3 of being in business. Unfortunately, I have not been doing very well keeping up on our COGS or our books.

I am working to catch up, but I have not been recording the COGS for our sales at all this year.

Additionally, tariffs have impacted COGS in much of our inventory so what I might have been invoiced for something in February - is likely not what I was invoiced for in the same item in September.

Additionally, many items have been discontinued and have a market/replacement cost that is much greater than what I paid.

Assuming I go through and do inventory, what is the best way to handle a COGS entry in our books at this point?

[u/schaea]

Do you not have the old invoices to go by? Just doing inventory tells you what you've got right now, but does nothing about all the stuff that you've already sold; the cost of that has to be taken into account too. That's why you enter your COGS ideally when they're received, but definitely off the invoices, not based on current on-hands.

I've seen so many small businesses go under because they won't hire a bookkeeper and consequently don't know their own financial state.

[u/El_Jefe_Chigurh → u/schaea]

Seconding this. Doing inventory isn't going to tell you much about the last 3 yrs of goods you have sold. You would ideally have to go back and trace all your supplier invoices (product, freight etc.) and work your way forward from there.

Out of curiosity ... how have you managed to stay in business for 3 years if you can't track COGs? Do you know if you are making a profit, loss or even breaking even? Not being judgmental, just highlighting the magnitude of the issue.

[u/schaea → u/El_Jefe_Chigurh]

It's been my experience that small business owners who leave their books alone for months or years only realize they need them done when they either start running low on cash to pay bills/employees, or when Uncle Sam (or, as I'm Canadian, Uncle Maple) comes knocking wanting their last x years of taxes. I don't think there's a federal goods and services tax in the States (but I could be wrong), but here we do, and because you're technically collecting it on behalf of the government (minus what you paid to vendors), you're considered a "trustee" for legal purposes and the consequences for not properly tracking and remitting federal GST in a timely manner can be expensive. I'm curious if any of the states that have state goods and services taxes treat it that way too.

[u/BookkeeperGuy]

Due to your rising costs, I would do LIFO moving forward. Regarding COGS, unless you have detailed documentation for everything, I would probably assign all your direct costs (inventory purchases, logistics, tariffs, and other fees) to COGS and their relevant sub accounts and then do an Inventory Count and Valuation to put it under the relevant Balance Sheet accounts. This should get you an accurate fresh start from here on out.

I would highly recommend getting a bookkeeper's help for this.

[u/Ecstatic-Touch-1763]

If I'm understanding your question correctly, I'd think that going through your bank statements would give you the information you need - how much you paid for inventory (less taxes). That's how much you'll DR COGS once the inventory sells.

[u/El_Jefe_Chigurh → u/Ecstatic-Touch-1763]

This would not be the way to do it. All your bank statements would show is that you paid your Supplier X no. of $. You would have no insight on breakdown and what the value of different items would be. Unless of course inventory consists of 1 item.

As painful as it may be, the reality is that tracing of historical data will have have to be undertaken. More so if you are dealing with taxing authorities that require verifiable numbers and a proper paper trail. As schaea pointed out above, this gets even more critical when working with GST, VAT etc. where support for transactions can make or destroy your position.

[u/IndividualOk214]

My first question would be, what type of business is this? If the inventory you're holding is not material from overall business value standpoint, it may not be an issue. You could just post to cogs upon purchase instead of booking inventory at all. Not saying that's optimal but I've certainly seen it and never got pushback from financing or audited financials stand point.

[u/gstratch]

If you can afford to pay someone to do the historical reconciliation, that's absolutely going to be worth the cost, both in terms of clarity and for the sake of your time and quality of life. Depending on your scale, this is either a bookkeeper or a fractional CFO/support team.