How Cogs Account for Payroll in Your Business

When it comes to accounting for payroll in your business, understanding the difference between costs of goods sold (COGS) and expenses is crucial. Many businesses struggle with this distinction, especially when it comes to tracking inventory and assigning costs to specific jobs.

In a cabinet shop, for instance, managing inventory can be a complex task. However, by setting up an account for COGS, you can keep track of the materials used in each job without having to list individual items on your invoices. This approach simplifies the process and ensures that you can accurately determine your gross profit.

But what about special orders or items not kept in inventory? Do you consider them COGS as well? The answer lies in understanding the purpose of COGS. COGS refers to the direct costs associated with producing a product, including materials and labor. In a cabinet shop, these might include items like melamine panels, slides, hinges, laminates, and closet rods.

On the other hand, expenses refer to indirect costs that are not directly related to production, such as sandpaper, tooling, sharpening, glue, dowels, WD40, earplugs, and stretch wrap. These expenses are typically easier to track and account for on a job-by-job basis.

In QuickBooks, COGS and expenses are separate accounts that can be tracked and reported separately. By using these accounts correctly, you can ensure accurate financial reporting and make informed decisions about your business.

For example, if you buy a box of hinges, you might initially record the cost as a COGS expense. However, when you pull those hinges out to use on a specific job, you would then assign the cost to that particular project. This approach allows you to track the costs associated with each job and ensure accurate reporting.

In conclusion, understanding the difference between COGS and expenses is crucial for accurate financial reporting in your business. By using QuickBooks and setting up separate accounts for COGS and expenses, you can simplify the accounting process and make informed decisions about your business. Whether you're a cabinet shop or any other type of business, following these best practices will help you achieve greater accuracy and transparency in your financial reporting.

Cogs account for payroll