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Cost of Sale (Resale) item and Expense (Non Resale) item and how to distinguish which is which? |
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Written by Nilsson Denver
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Tuesday, 12 August 2008 05:01 |
A simple Profit and Loss account looks like this:
Sales
less Cost of Sales
= Gross Profit
Less Expenses (Overheads)
= Net Profit
From your Gross Profit you can calculate your markup on costs and your profit margin as a percentage of sales. So if you place an expense in your cost of sales or a cost of sale in an expense account, the calculation of your markup and margins will be wrong. So how do we know what is a cost of sale and what is an expense?
A cost of sale is any cost item that directly affects the profit you make on an item you sell, such as;
The cost of the item
The carriage or freight cost needed to get it to your premises
The carriage or freight cost involved in getting it to your customer
Packing material and related costs
An expense is a cost that indirectly affects the profit you make on an item. Things you pay for whether or not you sell anything are expenses, such as;
Rent
Rates
Wages
All the overheads needed to keep the business running before you sell anything.
So if you follow the rules above this will help you with most situations. Each business can deal with cost of sales and expenses differently. The important thing is to deal with each item consistently i.e. if you treat something as an expense, always treat it as an expense, don't change it to a cost of sale one month and an expense the next month.
If you are manufacturing your own items or performing some other process to the item you are selling, then the way in which you handle costs will be different.
As you enter an invoice into your accounts system, what you need to think about each time is, does this have a direct or indirect affect on the items I am selling. Then you can determine whether it is a cost of sale or an expense. |
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Last Updated on Tuesday, 12 August 2008 20:56 |
