https://youtu.be/paIBItvU8i8
Inventory & COGS
Recording Cost of Goods Sold (COGS) | Cash vs. accrual methods
3 min
Transcript
0:00 Who this video is for
Hi ecommerce sellers. In this video, one of our gurus is going to demonstrate the difference between cash basis accounting and accrual basis accounting for your cost of goods sold. If you don't understand those terms, that's okay. For now, just understand that the accrual basis accounting is a more advanced method. This method is going to give you a better understanding of your margins over time, and as an ecommerce seller this is super important.
Before we dive into her demonstration, if you'd like more ecommerce accounting advice, make sure to hit the subscribe button right here, and you'll be notified as we come out with new videos every week that should be helpful to you as an ecommerce seller.
0:50 Cash basis versus accrual basis for COGS
When a client moves from cash basis to accrual basis accounting, a common concern that is expressed is the potential for overstating cost of goods sold, or potentially duplicating the entries that make up this value.
When a client is using a cash basis, the accounting is a one-step process. When cash is paid out, the value is converted directly to a cost of goods sold and hits the income statement immediately.
Accrual accounting requires a three-step process. When cash is paid out, it moves on the balance sheet from cash to inventory, just one asset converted to another asset, and doesn't affect the net income or hit the income statement until the product is actually sold. At that point, the value of the product that was sold then is expensed and is affecting that income.
1:38 Why the expense can't be duplicated
What is sometimes lost in the translation when a company transitions from cash to accrual basis accounting is that the accountant is still bound by double entry accounting principles, and everything must balance. So instead of viewing cash, inventory and COGS as like three separate buckets, really inventory and COGS is just two sides of the same coin, and will always balance to whatever was originally spent.
Now it is possible that the ratio of inventory and COGS is inaccurate and may need to be adjusted, but we can't duplicate expenses.
2:14
If you found this video helpful, make sure and hit that like button and subscribe to our channel. Also, please comment below with any questions that you have.