Sunday, October 9, 2011

Inventory and cost of goods sold for your Etsy or crafts business

Inventory and cost of goods sold can be a very confusing subject for many Etsy and crafts shop owners. Crafts makers have challenging issues:
  • They work with large quantities of small items (such as beads)
  • They work with items that are measured in yards or inches (yarn, threads, fabrics)
  • They work with items that have been previously owned personally by the business owner
  • They work with bits and pieces of materials (quilters, recycled or repurposed crafts, etc)
Here are some answers to some commonly asked questions:

Do you have to keep track of inventory?
Generally - yes. According to the IRS, “generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory.” There are some exceptions to this but unfortunately it does not apply to business owners who have a retail business or sell online.

What does inventory include?
Inventory includes:
  • Products not sold yet
  • Raw materials (materials used to make the things you sell)
  • Work in progress (merchandise that is not completed yet)
  • Supplies used to make the things you sell
How do you track inventory?
According to the IRS, “you must value your inventory at the beginning and end of each tax year to determine your cost of goods sold.”
Here is an easy way to do it:
a.     Do this on or around the last day of the year (around December 31)
b.     Gather items that would be considered inventory
c.      Make a list (quantity, description, and what you paid for it)
d.     Add up the total cost that you paid for it

How do I know what I paid for inventory?
First, you have to keep track of all receipts for your purchases. To determine what you paid for it – look at your receipts. If you don’t have receipts then look up the current cost online. Otherwise make your best estimate and write down that it’s an estimate.

Here are some suggestions that have worked for me:
  • Buy only supplies that you need to complete current orders - don't buy excess supplies
  • Add a note or sticker to the supplies you purchased that includes the date purchased, the store you purchased it from, the quantity purchased and the amount paid. For example, if you are using yarn, then write it on the yarn label. If you are using fabric, then write it down on a piece of paper and use a clothespin to pin it to the fabric. You may want to make yourself a label that looks something like this:

Do you really have to keep track of every little inventory item?
Technically - yes, but you also have to be reasonable. If you are a jewelry maker and you are using clasps or beading wire, maybe that is not major component of your jewelry. Your beads are probably the most expensive. You would probably be okay with not tracking the minor components and classifying them as supplies.

What is "Cost of Goods Sold"?
Cost of goods sold includes the cost of supplies used in making your products or the cost or merchandise bought for resale.  For example, if you make jewelry, then you would include the cost of beads and findings.  If you make crocheted hats, then this would include the cost of yarns and fibers. 

How do you calculate Cost of Goods Sold?
Cost of Goods Sold is calculated using the following formula:
   Beginning Inventory plus Purchases minus Ending Inventory = Cost of Goods Sold.

What are "Supplies"?
Supplies include the cost of small supplies that are not included in Cost of Goods Sold, such as glue, thread, needles, knitting needles, paint brushes, paints, etc.  You can also include the cost of books, and small equipment.  For example, if you make stuffies you would include the cost of needles, thread, buttons, scrap materials, fabrics and stuffing used to make samples.

Can you give me an example of what this looks like in real life?
Yes. Jane had the following activity in her business for the year:
  • $1,000 spent on bead purchases
  • $100 spent on jewelry findings (clasps, bead wire, etc)
  • $250 spent on jewelry display units
  • $300 in inventory at the beginning of the year
At the end of the year, Jane had some beads left. She also had 5 necklaces made which she did not sell. On December 31st, Jane used an inventory worksheet to count all of the beads. Her beads inventory at the end of the year totalled $245. She also calculated the cost of the beads and materials included in the 5 necklaces. This cost totaled $50. Based on this, her inventory at the end of the year is $245 plus $50 or $295.

She had only a few jewelry findings left, which she estimated at $25. She decided this was a minor amount and opted not to count it as inventory.

The jewelry display units are not inventory or cost of goods sold. They are considered supplies.

Her cost of goods sold for the year is calculated as: $300 (beginning inventory) plus $1,000 (purchases) less $295 (ending inventory) = $1,005.
Her inventory at the end of the year is $295.

Do you have an inventory worksheet I can use?
Yes, you can download a free Excel inventory worksheet at my website.

For a free article "10 Things You Must Know About Taxes, Bookkeeping, and Business Licenses" and for free Excel worksheets just for Etsy shop owners and creative entrepreneurs visit my website.

Stop worrying. Save hours of research online. Check out these Tax, Business, Accounting and Bookkeeping PDF e-book guides written by a CPA and creative entrepreneur just like you. Available for instant download.

Friday, September 16, 2011

Reviews of Outright accounting - a popular software package for Etsy shop owners

In case you haven't heard, Outright is a popular bookkeeping software for Etsy shop owners and crafts business owners. I have been curious about it for sometime and how it compares to QuickBooks. I am a QuickBooks expert and I use QuickBooks for my business so I wanted to know more about Outright from actual users.

Here are a few reviews:
The Work At Home Wife gives a very thorough review . She concluded that QuickBooks online will work better for her business.

Small Business Trends also has a very detailed review, including printscreens. They say "if you’re a sole proprietor, or a new entrepreneur, or you run a small home-based business, Outright is a great place to start keeping your books."

factoidz points out key differences between Outright and other programs such as QuickBooks. They also include customer feedback from actual users.

I hope that these reviews help you decide. You can always try Outright free for 30 days. Keep in mind ease of use, the size of your business, and what Outright will do versus other more robust software packages like QuickBooks.
For a free article "10 Things You Must Know About Taxes, Bookkeeping, and Business Licenses" and for free Excel worksheets just for Etsy shop owners and creative entrepreneurs visit my website.

Stop worrying. Save hours of research online. Check out these Tax, Business, Accounting and Bookkeeping PDF e-book guides written by a CPA and creative entrepreneur just like you. Available for instant download.

Wednesday, September 14, 2011

Should you use QuickBooks for your Etsy shop or crafts business?

This is a very common question in the crafty and Etsy forums. Should you use QuickBooks for your Etsy shop or crafts business? It depends.

Newbies
If you are relatively new and don't have a lot of extra funds yet, you can use a simple Excel bookkeeping worksheet.

Your business is growing
If your business is growing and you have excess funds then you should consider using QuickBooks. Keep in mind that just because you use QuickBooks you are not guaranteed that your bookkeeping will be in order. Think of it this way, you don't drive a car if you haven't had driving lessons. When you purchase QuickBooks you may need to pay a QuickBooks expert to set it up for you and to show you how to use it correctly and specifically for your crafts business. You should budget approximately $150 for purchasing QuickBooks and at least $300 for paying the QuickBooks expert for their services.

You replaced your day job with your Etsy or crafts business
If you have been able to replace your day job then you really need to get your bookkeeping in order so that you can manage your business properly and pay your taxes. In this case, you should defintely be using QuickBooks and consider hiring a bookkeeper so you don't have to do it all yourself.

There are of course other software products out there for Etsy shop owners and craftypreneurs, including Outright. Check them out and determine what's best for you. The main thing to remember is that any accounting software that you purchase does not guarantee that you will set it up correctly or use it correctly. Consider the funds that you have available and the size of your business.

For a free article "10 Things You Must Know About Taxes, Bookkeeping, and Business Licenses" and for free Excel worksheets just for Etsy shop owners and creative entrepreneurs visit my website

Stop worrying. Save hours of research online. Check out these Tax, Business, Accounting and Bookkeeping PDF e-book guides written by a CPA and creative entrepreneur just like you. Available for instant download.

Friday, September 9, 2011

Simple Excel bookkeeping spreadsheet for Etsy shop owners and craftypreneurs

If your crafts or Etsy business is small and you don’t want to get too complicated with your bookkeeping and accounting then you can use a simple Excel worksheet to track income and expenses.  If you use Excel, you can set up the worksheet on Excel. You can download a free Excel worksheet from my website when you join my mailing list.

The advantages of using a simple bookkeeping and accounting worksheet for your Etsy and crafts business are ease of use and low cost.  The disadvantage of using a worksheet is that you have to add up transactions manually to record onto the worksheet.  Also, a worksheet does not provide you with financial reports like a computerized bookkeeping and accounting system does. 

You can download a simple Excel bookkeeping and accounting worksheet from my website. You can use to it to track business income and expenses on a monthly basis.  The categories used match IRS “Schedule C”.  IRS “Schedule C” is the form that is used to report income or loss from a business organized as a sole proprietor on IRS Form 1040 – an individual tax return.  By using this form you will save lots of time when you file your individual tax return since everything will already be categorized. 

For a free article "10 Things You Must Know About Taxes, Bookkeeping, and Business Licenses" and for free Excel worksheets just for Etsy shop owners and creative entrepreneurs visit my website.

Stop worrying. Save hours of research online. Check out these Tax, Business, Accounting and Bookkeeping PDF e-book guides written by a CPA and creative entrepreneur just like you. Available for instant download.

Wednesday, September 7, 2011

Have you paid your estimated tax payments for your Etsy shop or crafts business?

Many small business owners and Etsy shop owners get into trouble with the IRS because they do not make estimated tax payments or they do not have the funds to pay the IRS for taxes on their crafty business when they file their income tax return.  This is what you need to know:

1.     If you are organized as a sole proprietor (you file Schedule C) - your business profits are subject to federal income taxes and also self employment taxes (due to the IRS).

2.     You have to set money aside to pay for federal income taxes and also self employment taxes.

The IRS wants you to make “estimated” payments on a quarterly basis for the taxes that you estimate you will owe.  If you do not make estimated tax payment the IRS may charge a penalty.  Estimated tax payments are due on April 15, June 15, September 15, (of the current tax year) and January 15 (of the following year). In other words, for 2011, you would pay estimated tax payments on April 15, June 15, and September 15 of 2011 and on January 15th of 2012. 

Most small business owners do not like to make estimated tax payments because they think it’s inconvenient. You can make estimated tax payments online or on the phone using www.EFTPS.com – it’s easy and convenient. Many small business owners also do not like to pay the IRS for income and self employment taxes because they don’t have the money or just don’t like to. I understand how they feel but look at it this way –your employer (if you are employed)  deducts taxes from your paycheck. In the end we all pay taxes. The best thing to do is to make sure that you put money aside to pay for estimated taxes. Make sure you do that or you may get into trouble with the IRS.  For more information, refer to Publication 505, Tax Withholding and Estimated Tax http://www.irs.gov/publications/p505/index.html.


For a free article "10 Things You Must Know About Taxes, Bookkeeping, and Business Licenses" and for free Excel worksheets just for Etsy shop owners and creative entrepreneurs visit my website.

Stop worrying. Save hours of research online. Check out these Tax, Business, Accounting and Bookkeeping PDF e-book guides written by a CPA and creative entrepreneur just like you. Available for instant download.

Thursday, September 1, 2011

Business income and business expenses - a primer for Etsy shop owners and craftypreneurs

On my last post I talked about the importance of separating business income and expenses from personal income and expenses. Let's look at the definition of business income and business expense.
Business income refers to money you have earned in your business. Business expenses refers to money you have spent on your business. The IRS also defines business expenses as “the cost of carrying on a trade or business.”  The IRS also indicates that business expenses must be “ordinary and necessary.”  The IRS points out that “an ordinary expense is one that is common and accepted in your trade or business.  A necessary expense is one that is helpful and appropriate for your trade or business.”  For more information see IRS Publication 334 – IRS Tax Guide For Small Business.

For a free article "10 Things You Must Know About Taxes, Bookkeeping, and Business Licenses" and for free Excel worksheets just for Etsy shop owners and creative entrepreneurs visit my website.

Stop worrying. Save hours of research online. Check out these Tax, Business, Accounting and Bookkeeping PDF e-book guides written by a CPA and creative entrepreneur just like you. Available for instant download.

Tuesday, August 30, 2011

Keep your Etsy/crafts business income and expenses separate from your personal stuff

Many creative entrepreneurs and Etsy shop owners fail to separate their business income and expenses from their personal income and expenses. This is called “co-mingling of funds.” A good way to separate business income and expenses from personal income and expenses is to open a separate business bank account. Be sure to run all business income and expenses through the business bank account. The reason that you want to separate business from personal funds has to do with legal and tax purposes. First, when a business is organized as a limited liability company, corporation, or partnership, that business it is a separate legal entity from its owner or owners and it should have a separate bank account. Second, co-mingling of funds can bring up a lot of negative consequences in case of an IRS audit. On my next post I'll talk more about business income and business expenses.

For a free article "10 Things You Must Know About Taxes, Bookkeeping, and Business Licenses" and for free Excel worksheets just for Etsy shop owners and creative entrepreneurs visit my website.

Stop worrying. Save hours of research online. Check out these Tax, Business, Accounting and Bookkeeping PDF e-book guides written by a CPA and creative entrepreneur just like you. Available for instant download.