INVENTORY – an accounting term and bookkeeping task that causes terror and total confusion in the hearts and minds of makers, designers, or anyone who owns a handmade or creative business.
Let’s start with – Why is inventory important?
Materials and supplies are probably the BIGGEST spending category many of us have in our handmade or creative business.
- BUT we can’t expense or deduct materials and supplies in the year that we bought them
- We MUST wait until the year that we sell the finished item BEFORE we can deduct the cost of the supplies used in that item as Cost of Goods Sold
- And, you need to keep detailed records of what you bought, how much your bought and what you paid for it in the meantime.
I bet I know what you’re thinking……HEY WAIT – did I read that right, or did you make a typo…. we can’t expense or deduct materials and supplies in the year that we bought them – we MUST wait until the year that we sell the finished item BEFORE we can deduct the cost of the supplies used in that item as Cost of Goods Sold.
You did read that correctly, it’s not a typo.
Inventory is sort of a bookkeeping black hole. You have to keep track of the cost of all the materials and supplies that you keep on hand to make your finished items, in detail – but you can’t deduct what you spent when you spend it. Yes, you spent the money – but Inventory is an Asset and it’s tracked on the Balance Sheet. It doesn’t hit Cost of Goods Sold on your Profit & Loss Report UNTIL you sell the item that you used the materials in and then it’s only the cost of the materials that you used in that specific item.
Next, let’s talk about – What is inventory?
Inventory consists of the cost of:
- Finished items: Think about all those finished items that you have stored on your closet shelves or in totes that are available for sale. If it’s a finished item and you plan on selling it at some point in the future, it’s considered inventory.
- Works in progress (WIP’s): The items you’re working on but haven’t finished yet are considered inventory too.
- Materials & Supplies: All materials or supplies that you keep on hand and/or use in the actual finished items.
And – Who needs to deal with inventory?
Makers, designers, and other creative businesses have different types of inventory and, therefore, different types of bookkeeping or accounting needs for both tax purposes and your own information.
- As a maker selling finished items you need to deal with inventory for both tax purposes and your own information.
- If you are a tech editor, you don’t need to track inventory for tax purposes – BUT you may want to for your own information.
- As a designer, your digital patterns are not considered inventory – BUT the materials for your finished samples might be if you plan to sell them or keep materials on hand to make future designs.
- If you only do custom orders and keep materials and supplies on hand, then you’ll need to track inventory for both tax purposes and your own information.
Some people like to use spreadsheets – but I prefer software and if you join me on January 8, 2020 in my free webinar “Thinking of ditching the spreadsheets and using (QuickBooks) software for your bookkeeping needs” – I’ll show you why!
But wait – what about – How to track inventory.
Keeping track of inventory involves a LOT of detail and you really need good system for tracking:
- the items you bought
- how much you bought
- what you paid for it
You need to keep ALL your receipts and keep your system updated as you buy and use the materials you purchased because there is a fair amount of work that goes into tracking inventory.
We’ll do a deep dive into tracking inventory next week; AFTER the free webinar.
Until then, happy creativity