Hello all, I have a startup company that I am working through and I had a couple bookkeeping questions. It is a very small startup, $20K income/expenses per year. We buy materials and create products which we either sell or let another company rent them out. How would the recording for this work? Would I need to do raw materials, finished goods and etc? How do you know exactly how much raw materials you have used? How does it work if its rented? Does it go into fixed assets? I was hoping since we are such a small company, there can be an easier way to do this instead of using inventory accounting. Any help would be much appreciated!!
You can account for inventory more informally via an "indirect method" of accounting. This is where you run all of your material and product purchases through Cost of Goods Sold (CoGS) initially, then adjust for inventory balance as of the fiscal year end (assuming 12/31 below).
For example, let's say you had 5 widgets worth $5,000 at the start of the year. You then purchased 10 widgets, costing $20,000 of raw materials and products for 2020. You expensed it all as CoGS. Come December 31st, there's only 2 widgets in stock, amounting to about $2,000. You adjust for the difference of your beginning balance ($5,000) for your ending balance ($2,000), or a $3,000 inventory adjustment debited to CoGS.
Beginning Inventory: $5,000
Purchases: $20,000 =
Goods Available for Sale/Rent: $25,000
Cost of Goods Sold: ($23,000) =
Ending Inventory: $2,000
If it is rented, then your inventory should always reflect a balance that includes those products available for rent (assuming they remained available by fiscal year end).
I would ignore the raw/finished goods portion of the inventory and just count its cost towards the fiscal year-end inventory balance.