![]() Costs of selling, packing, and shipping goods to customers are treated as operating expenses related to the sale. income tax purposes, some of these period costs must be capitalized as part of inventory. For financial reporting purposes such period costs as purchasing department, warehouse, and other operating expenses are usually not treated as part of inventory or cost of goods sold. Most countries' accounting and income tax rules (if the country has an income tax) require the use of inventories for all businesses that regularly sell goods they have made or bought.Ĭost of goods purchased for resale includes purchase price as well as all other costs of acquisitions, excluding any discounts.Īdditional costs may include freight paid to acquire the goods, customs duties, sales or use taxes not recoverable paid on materials used, and fees paid for acquisition. The total is the same, but the timing is much different. If he deducted all the costs in 2008, he would have a loss of $20 in 2008 and a profit of $180 in 2009. If he keeps track of inventory, his profit in 2008 is $50, and his profit in 2009 is $110, or $160 in total. In 2009, he sells the remainder of the parts for $180. He sells parts for $80 that he bought for $30, and has $70 worth of parts left. A business that produces or buys goods to sell must keep track of inventories of goods under all accounting and income tax rules. Inventories have a significant effect on profits.
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