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Finaloop enables you to track expenses and associate them with different inventory categories.
Inventory-related costs are reflected in your P&L and balance sheet.
The degree to which you fine-tune the categorization will depend on your business needs and chosen inventory method (purchase based, sales-based or unit based using InventoryIQ).
In this article, we'll explain how to treat certain inventory purchases (or incidental purchases) directly as COGS, instead of impacting your inventory or vendor balances. We'll also explain how to change the default treatment for specific vendors or categories to automate this for you moving forward.
IMPORTANT: If you are using sales based COGS or InventoryIQ, in certain circumstances, inventory related purchases can be expensed immediately on your P&L instead of being added to the value of your inventory on the balance sheet. Typically, this is allowed for specific purchases of ‘incidentals’, like bubble wrap or packing paper. If this is relevant, then read on!
This is not relevant if you track COGS using the purchase based method.
What are ‘Incidentals’?
Incidentals are expenses related to supplies or materials that are not a material part of your actual product or business.
If you purchase specific supplies or materials that are not part of your main product, you have no real system to track the consumption relating to it, and have no beginning or ending inventory balances for this item, you can usually take them as an immediate expense by marking it as an incidental cost.
Common examples of incidental items are bubble wrap, packing paper, masking tape, etc.
Option 1: Use the category ‘Other incidental supplies’
>To categorize inventory-related transactions:
Navigate to Transactions and using the Search or filter, locate the transaction.
On the relevant row, click the Category.
Verify that it’s the correct transaction and change the category to ‘Other incidental supplies’.
If this is a one-time classification click Apply once, otherwise click Apply always.
NOTE: When you mark a cost as Other incidental supplies, it will appear directly in your P&L under your COGS section.
Option 2: Change the accounting treatment
Instead of changing the transaction category of the specific transaction, you can change the accounting treatment of specific inventory transactions so it will be treated directly as COGS instead of impacting your inventory or vendor balance.
1. Sales based COGS
To change the accounting treatment for specific transactions if you use sales based COGS:
Navigate to the Purchases tab in your Inventory module.
Select a transaction from the list of purchases and click Actions>change accounting treatment.
From the dropdown, select COGS as the category type and click Save.
Note that certain inventory transaction categories, such as Finished products, can't be treated as COGS based on US tax laws. To change the category of the transaction, see Option 1 above.
2. InventoryIQ
To change the accounting treatment for specific transactions if you use InventoryIQ:
Navigate to the Purchases tab in your Inventory module and then Bills & Payments.
Select a transaction from the list of purchases and click Actions>change accounting treatment.
From the dropdown, select COGS as the category type and click Save.
Note that certain inventory transaction categories, such as Finished products, can't be treated as COGS based on US tax laws. To change the category of the transaction, see Option 1 above.
Pro tip: Change default accounting treatment
If a certain vendor or category should always be treated as COGS instead of impacting your inventory or vendor balance, under Actions select Accounting treatment default. Then, add a rule based on vendor name, category, or both to change the default accounting treatment.
If you have any other questions, or are still not sure which method makes the most sense for you, contact us at [email protected], we're happy to help!