How to ‘Account’ for Inventory

As a reseller of product, you must deduct the cost of the items sold from the income received when you sell the item.  You can not ‘write off’ your entire purchases for the year, but must hold unsold items in inventory.  You must track the cost of the items you sell, and track the income that you receive from re-selling the product.

Track the cost of items you add to inventory

As a direct seller, your company remits the GST, PST or HST for you on the full retail value of the item.   This way, you do not have to collect and remit the taxes on your sales.

Your cost is the retail value of the item less commission plus taxes at the retail value.  For instance, if the item retails for $100, the company will remit $5 GST  to Canada Revenue Agency and the appropriate PST or HST to your province.  Refer to the examples at the end of the article.  You need to track the total purchases you make during the year that are put into inventory.

You need to count the inventory at the end of the year then calculate its cost.  To determine its cost, use the retail value and the calculations you made when you added it to inventory.  Refer to the examples at the end of the article.  You need to be able to identify those items you received as a gift and not include any cost in ending inventory.  A simple way of identifying those items is to tag them with a colored sticker.  The customer has no idea what the sticker means if s/he inadvertently gets an item with the sticker still attached, but you will know that your cost on that item was zero.  On a different colored sticker, record the cost of the item.  If you don’t want anyone to know the cost if the sticker is inadvertently left on the item, then reverse the digits.  If the cost is 72.50, then write down 0527. This also makes it easy when you are counting the cost of your inventory at the end of the year.

Knowing the beginning and ending inventory and the amount of purchases, we can then calculate the cost of what you sold during the year.  Remember that if you received the item as a prize or a gift, the cost is zero.

Beginning Inventory + Purchases = Goods available for sale during the year
Goods available for sale during the year - Ending Inventory = Cost of items you sold

Track the sales from Inventory

When you sell a product from inventory, you must report that sale as income, including any GST, PST or HST that you charged/recovered on that item.  A good trick is not to use the same set of invoices that you use for taking customer orders.  Get a separate invoice book or different colored paper.  If you were selling at a location (eg craft sale, show) where all the sales are likely from inventory, then staple those invoices together, total them and mark them clearly as sales from inventory.  When doing your bookkeeping, track the sales from inventory separate from commissions.   

 
Reselling items you received as gifts or at a reduced rate

If you received an item as a gift, your cost is zero.  However, when you re-sell it, you would be charging GST, PST or HST on that item.  That GST, PST or HST has not been remitted by your company, because they gave it to you as a gift.  You need to remit that GST, PST or HST yourself.  A simple way of knowing which items you received free or at a reduced cost is to attach a colored sticker to the actual item.  If you received it at a reduced rate, calculate and put the cost on that sticker.  If you don’t want anyone to know the cost if the sticker is inadvertently left on the item, then reverse the digits.  If the cost is 72.50, then write down 0527.

Examples calculating the cost of items you sell assuming retail = $100 and commission = 40%

British Columbia up to June 30, 2010:
            cost = ($100 x (5% + 7%)) + (100 x 1-40%) = 12 + 60 = $72
British Columbia after June 30, 2010 (HST):
            cost = ($100 x 12%) + (100 x 1-40%) = 12 + 60 = $72
Alberta:
             cost = ($100 x (5% + 0%)) + (100 x 1-40%) = 5 + 60 = $65
Saskatchewan:
             cost = ($100 x (5% + 5%)) + (100 x 1-40%) = 10 + 60 = $70
Manitoba:
             cost = ($100 x (5% + 7%)) + ($100 - 1-40%) = $12 + $60 = $72
Ontario up to June 30, 2010:
            cost = ($100 x 5%) + ($105 x 8%) + ($100 - 1-40%) = $12 + $60 = $73.40
Ontario after June 30, 2010 (HST):
            cost = ($100 x 13%)  + ($100 - 1-40%) = $12 + $60 = $73.00
Quebec up to Dec 31, 2010:
            cost = ($100 x (7.5% + 5%))  + ($100 - 1-40%) = $12 + $60 = $72.50
Quebec after December 31, 2010:
            cost = ($100 x (8.5% + 5%))  + ($100 - 1-40%) = $12 + $60 = $73.50
New Brunswick (HST)
             cost = ($100 x 13%)  + ($100 - 1-40%) = $12 + $60 = $73.00
Nova Scotia (HST)
            cost = ($100 x 13%)  + ($100 - 1-40%) = $12 + $60 = $73.00
Prince Edward Island
            cost = ($100 x (5% + 10%))  + ($100 - 1-40%) = $12 + $60 = $75.00
Newfoundland and Labrador (HST)
            cost = ($100 x 13%)  + ($100 - 1-40%) = $12 + $60 = $73.00
Yukon
           cost = ($100 x 13%)  + ($100 - 1-40%) = $12 + $60 = $73.00
  Northwest Territories
           cost = ($100 x 13%)  + ($100 - 1-40%) = $12 + $60 = $73.00
Nunavut   
           cost = ($100 x 13%)  + ($100 - 1-40%) = $12 + $60 = $73.00