Cost of Goods Sold for an Arts or Crafts Merchandising Business

By Maire Loughran, About.com Guide

An arts or crafts merchandiser is a retail business like a craft boutique, craft supply store or art gallery. The arts and crafts merchandising business purchases goods from another artist or crafter and in turn sells the handcrafted items to the end user - a consumer like you or me. Another good example is a bead shop who purchases beads in bulk from a supplier and sells them to other artists and crafters or hobbyists.

If buying from other artists or crafters and reselling these items through your craft business is part of the way you operate, here's how you reflect these purchases on your income statement in your cost of goods sold.

Arts or Crafts Beginning Inventory

Figuring COGS for a merchandiser starts with beginning inventory, which are goods you have available for sale at the beginning of the month (in other words, the leftover inventory from the prior month). Many small artists and crafters don't take an inventory at the end of each month. Instead, they kind of eyeball their inventory and come up with a rough estimate. This is perfectly alright for interim financial statements. But when you are doing your financial statement at year-end, you should take an actual physical inventory so for an accurate count.

Arts or Crafts Cost of Purchases

Next, you have to figure the cost of purchases. To do so, you add together two items:

1. Any new merchandise you buys from other artists and crafters during the current month.
2. And any shipping expense your business incurs in order to get the merchandise purchases from the handcrafter to your location. For example, if purchases for the month of April are $125,000 and freight-in is $10,500, your cost of purchases is $135,500.

Arts or Crafts Net Purchases

Your next step is to figure net purchases, which means cost of purchases less contra purchases. Two contra purchase accounts exist:

1. Purchase discounts which are discount a you receive from the handcrafter because you pays a their invoice early.
2. And, purchase returns and allowances which consists of items a you might order from a handcrafter that you end up returning. This might happen if an order arrives too late to use, arrives damaged, or doesn't contain what you actually ordered.

Figure purchase discounts being $5,000 and purchase returns and allowances equaling $7,000. Your net purchases amount is $123,500.

Arts or Crafts Cost of Goods Available for Sale

Adding net purchases to beginning inventory gives you cost of goods available for sale. So if beginning inventory is $5,000, costs of goods available for sale is $128,500 ($123,500 plus $5,000).

Arts or Crafts Merchandising Business Cost of Goods Sold

Okay, just one more calculation! Subtract ending inventory, which is the merchandise you still have available for sale on the last day of the accounting period, from cost of goods available for sale. Then you have your cost of goods sold! Continuing our example, if ending inventory is $10,000, your cost of goods sold is $118,500 ($128,500 minus $10,000).