I am having a bit of a “discussion” with my accountant about cost accounting. He is insisting one needs to use exact acquisition costs for materials to determine cost of goods sold. That means, every time I order gold or silver, I should record the exact cost of each lot of sheet, wire, etc. and determine the exact (plus waste) quantity used and use that as the basis for the cost of the item. That’s enough to drive one crazy. What I’d LIKE to do is use the present spot price on the day of manufacture as the cost basis. So, if I use 2dwts of 18k and the spot that day is $1,400 the basis would be 2(.055)(1,400).75 for a cost of $115.50. I realize that ignores mill costs. What does everyone else do??
I use a piece of software called Jewelry Designer Manger Premier Plus. Said software lets me keep track of every purchase I’ve made. (Yes, I do record every single purchase. ) It automatically calculates the weighted average of a DWT of sterling silver from all purchases that I’ve made. When I fabricate a piece, I’ve gotten into the habit of weighing the metal I’m going to use and recording what was used in the creation of the piece, findings, stones, The software automatically generates the cost of materials in a piece.
The software lets me keep track of customers, generate a variety of reports including consignment memos, invoices or items sold, and most importantly material cost of each piece. Generally the software has made pricing easier and tax time a breeze…
I used to spend a week preparing for the account and now all I do is print a couple reports. It does force a change in process, though, you do have to keep track of what you did and update the software database.
The link to their site is BejeweledSoftware.com I have no affiliation with the company, etc. this is just wha I do. I’m sure others do something different.
If you use the spot price method you’re suggesting, your books are never going to reconcile except by sheer chance. The spot price can obviously be used as a factor in the selling price of the piece, but it is unrelated to your actual cost.
Imagine if you stockpiled gold when it was at a relative low, and later in the year when the price was at a high, you manufactured several pieces. Under your proposed method, you’d be entering an artificially high expense into your books, which would inflate your COGs as reported on your tax return. If you’re audited for that year, what expense records are you going to use as documentation for those costs?
Your accountant is correct, although I’d say “actual cost” vs. “exact cost” — just be consistent (and correct) about how you determine “actual cost”.
I don’t know of any busy goldsmith who does it the way your accountant is suggesting. It becomes not only too time consuming but I think nearly impossible to track every little fraction of material used, consumed by your buff or clipped prong the flies across the shop. If you could do it it would provide you with neat and tidy books (which would please your accountant) but doing so would reduce your productivity and not really provide you useful information. The accountants method works if you’re building computers, where you buy components and assemble them into a salable item, but isn’t as easily applied to making things from raw materials.
I noticed that Quickbooks wants you to do it like your accountant suggests. Any purchased material, finding or stone can only be removed from your inventory by assigning it to an item sold. Totally impractical for what we do. That’s something your accountant would understand if they better understood your business. Mine does.
Most people carefully track and categorize their cost of goods and other operational expenses, and track their income( breaking that down as necessary). But don’t assign each bit of wire, solder and dwt of grain to each individual sale.
Are you running jewellery repair & special order shop or what? Let your accountant stay with you for a week and figure out for every lost, misplaced one point diamond you dropped. Then tell him to stop playing his numbers game. I have other less favourable words to write, but I might get booted off Ganoksin…;(
I’d get a new accountant who totally understands this profession!
I really think the general consensus here is to tell your accountant to reconfigure his books & stop wasting your precious time…;(
Gerry! from my Toronto iPhone!
The government’s point of view is you are most likely overstating your cost (thus not paying enough tax) if you use the spot price in your Cost of Goods Sold, because precious metal prices usually increase over time. They would probably like for you to use spot price when pricing your work… more profit = more tax liability.
Your inventory method, such as LIFO or FIFO, requires you to record what you paid per unit (based on your method of weighing it). After that, you simply keep a running total as you use it; which is easily done when you weigh the metal before you start a project. Then when you finish the metal work in a project, the difference in weight is waste.
Alternatively, you could buy grain and roll your own sheet and draw wire. Therefore, separate sheet and wire cost would be unnecessary.
I also use Jewelry Design Manager by Bejeweled. I have no formal affiliation with them. This software allows me to not only track all my purchase prices for any items, but also to record photographs for the finished pieces which can print on the invoice. The reporting is pretty great. Updates are easy to install. For my part, I back up every day just before closing my studio.
Service is excellent. Barbara, the owner, software guru, replies within hours and quickly on the phone, when necessary.
Your accountant is right concerning using your actual cost of materials as the Cost of Goods Sold for determining the Gross Profit line on your Profit and Loss statement for tax purposes. Your taxes are based on your total income minus your actual cost of the goods you sell (what you actually write checks for), less other costs associated with doing business. The IRS won’t let you determine your own basis based on market fluctuations, they will only accept actual, provable cost.
You should keep all receipts and bank records to prove your actual cost in case you are ever audited. Not just the cost of materials, but everything you plan to deduct from your income.
Any losses due to breakage or waste are automatically included in your Cost of Goods Sold because you paid for them and weren’t reimbursed by selling the finished piece at a higher price. Changes in metal markets will be reflected over time in your inventory value and will show up indirectly as a gain or loss there, not on a Profit and Loss statement.
This stuff isn’t just for the IRS. If you ever apply for a business loan, you will most likely be required to produce a few year’s accurate Profit and Loss statements. They won’t let you set your own basis either Would be nice if they did though…
There’s obviously much more to this, but basically you must keep a verifiable record of every penny you spend if you don’t want to pay taxes on it as income. Trust your accountant. You’re paying them big bucks so they can help you avoid trouble with the IRS. Tax accounting is a very complex subject, especially when there’s a business - even a tiny one - involved. They know the ropes, let them help.
Welcome to self-employment! I hope this is helpful.
Barbara From Bejeweled was very helpful to me many years ago. I needed some pretty specific software for my business and asked her about adapting her application. She couldn’t do that but she took the time to connect me to someone she knew who could write the software for me. Just did it because she’s a good person. I remain very grateful.
This is a very big question when it comes to running a jewelry fabrication business. The IRS, in theory requires that you track every single item that goes into the production of a piece. You are supposed to select an accounting method, First in First out, or Last in Last out, AND you have to report which method you use. Software like quicken does not easily let you assemble a product from goods and then sell that piece. The software mentioned in other posts help you do this. Back in 2010, I tried the few software packages on the market, and selected Bead Pro Manager. It was a nice start but it didn’t suit my needs, so I ended up writing my own software in File Manager Pro. It has evolved with me as my business has grown and allows me to easily manage my inventory, casting costs, pieces COG, sales, exports to my website, etc…So yes, I know my COG for each piece. As for the accounting method on items I buy repeatedly, I use an averaging method. This approach is probably not valid if I am audited, but it is too difficult to track all the waste, and lost material, or pieces that I reuse. I also calculate my running inventory value, (which is required to be report to IRS) by calculating the total amount I spent on parts that year, minus the total COG in pieces sold (not items not sold). If my business grows to provide me a significant revenue in the future, I will shift to one of the official reporting methods instead of average. At this point, the averaging method is not in my favor in terms of taxes, so I have not invested the time to change it. At that point, I will be required the report in the accounting method change and assess the impact on previously paid taxes.
I would expect that your decision as to how to proceed depends on the size of your business. If your business is not your primary source of income and you are a sole proprietor and do not take many deductions from your personal income you might not want to follow my example. On the other hand, if you have a significant full-time business and buy a lot of precious metal and have significant deductions, you might want to talk to a few different accounts on how you can move forward from this point since you have not been tracking this detail.
Your accountant doesn’t understand our industry.
Shop costs are used quickly, when setting up stores for QuickBooks we write off all shop costs as most people order “just enough” or a tad more.
Check out my chart of accounts, show it to your cpa
here is what a jewelry stores P&L looks like when setup correctly and like this:
Thanks Rebecca et al. I think I have gotten my answer. I am recently retired and just plan on low volume to keep myself busy. I knew there was a reason I hated accounting in school. I’ve worked production jewelry manufacture and just am not interested in that grind again. I’m planning on sticking with low volume pieces in high karat gold … so can just order what I need for a piece and use that as my basis for cost of goods sold - and avoid the whole inventory hassle by clearing out at the end of each year. (personally, I have great respect and admiration for anyone who can stay afloat trying to compete in the silver market). That model would certainly not work for folks who are operating an ongoing business … but I think I can make it work. I hate Quickbooks because it really is overly complicated for what I am doing - my accountant wants me to use that as well because it works for him because he can just take my Quickbooks files and go with it. I’m not trying to feed my family on my income, so I think I can find a middle road here … that will keep my accountant and the IRS happy. Thanks again to everyone’s input.
Thanks for those links David.
the P & L is informative…the chart of accounts not available for some reason
I’m always on the lookout for job tracking software for a trade shop. Different than retail software where each customer buys one thing. Here you’re always doing work for the same group of stores, entering job with the customer job #, task, insurance value, due date and description. Then when it’s complete you create an invoice, using the customer job # to populate the line and add the charge, then repeat with as many jobs you have for that invoice. Then create statement from those invoices by selecting a date range. Other features are search, reports…
I have one but it’s old, I need to replace it. Anyone seen anything similar?
You and your accountant are both right. There are actually two “costs” involved here. Your acquisition cost is the amount you actually pay for materials. Your accountant is correct in that you should record the actual cost of materials when you pay for them, since it is a matter of tax accounting. When you make a piece, however, as a matter of business, you really aren’t concerned about the acquisition cost, but rather the replacement cost. So when determining the price of the piece, you should use the replacement cost of materials, which more closely resembles the current market rates, plus a factor to take shipping costs, etc. into account.