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Free State E File TaxesFree state e file taxes 7. Free state e file taxes Figuring Gross Profit Table of Contents Introduction Items To Check Testing Gross Profit AccuracyExample. Free state e file taxes Additions to Gross Profit Introduction After you have figured the gross receipts from your business (chapter 5) and the cost of goods sold (chapter 6), you are ready to figure your gross profit. Free state e file taxes You must determine gross profit before you can deduct any business expenses. Free state e file taxes These expenses are discussed in chapter 8. Free state e file taxes If you are filing Schedule C-EZ, your gross profit is your gross receipts plus certain other amounts, explained later under Additions to Gross Profit. Free state e file taxes Businesses that sell products. Free state e file taxes If you are filing Schedule C, figure your gross profit by first figuring your net receipts. Free state e file taxes Figure net receipts (line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). Free state e file taxes Returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off the actual sales price. Free state e file taxes Next, subtract the cost of goods sold (line 4) from net receipts (line 3). Free state e file taxes The result is the gross profit from your business. Free state e file taxes Businesses that sell services. Free state e file taxes You do not have to figure the cost of goods sold if the sale of merchandise is not an income-producing factor for your business. Free state e file taxes Your gross profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). Free state e file taxes Most professions and businesses that sell services rather than products can figure gross profit directly from net receipts in this way. Free state e file taxes Illustration. Free state e file taxes This illustration of the gross profit section of the income statement of a retail business shows how gross profit is figured. Free state e file taxes Income Statement Year Ended December 31, 2013 Gross receipts $400,000 Minus: Returns and allowances 14,940 Net receipts $385,060 Minus: Cost of goods sold 288,140 Gross profit $96,920 The cost of goods sold for this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900 Minus: Items withdrawn for personal use 2,650 283,250 Goods available for sale $321,095 Minus: Inventory at end of year 32,955 Cost of goods sold $288,140 Items To Check Consider the following items before figuring your gross profit. Free state e file taxes Gross receipts. Free state e file taxes At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. Free state e file taxes You may find it helpful to use cash registers to keep track of receipts. Free state e file taxes You should also use a proper invoicing system and keep a separate bank account for your business. Free state e file taxes Sales tax collected. Free state e file taxes Check to make sure your records show the correct sales tax collected. Free state e file taxes If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts. Free state e file taxes If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income. Free state e file taxes Inventory at beginning of year. Free state e file taxes Compare this figure with last year's ending inventory. Free state e file taxes The two amounts should usually be the same. Free state e file taxes Purchases. Free state e file taxes If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc. Free state e file taxes ) be sure to remove them from the cost of goods sold. Free state e file taxes For details on how to adjust cost of goods sold, see Merchandise withdrawn from sale in chapter 6. Free state e file taxes Inventory at end of year. Free state e file taxes Check to make sure your procedures for taking inventory are adequate. Free state e file taxes These procedures should ensure all items have been included in inventory and proper pricing techniques have been used. Free state e file taxes Use inventory forms and adding machine tapes as the only evidence for your inventory. Free state e file taxes Inventory forms are available at office supply stores. Free state e file taxes These forms have columns for recording the description, quantity, unit price, and value of each inventory item. Free state e file taxes Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. Free state e file taxes These forms will help satisfy you that the total inventory is accurate. Free state e file taxes They will also provide you with a permanent record to support its validity. Free state e file taxes Inventories are discussed in chapter 2. Free state e file taxes Testing Gross Profit Accuracy If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure. Free state e file taxes First, divide gross profit by net receipts. Free state e file taxes The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price. Free state e file taxes Next, compare this percentage to your markup policy. Free state e file taxes Little or no difference between these two percentages shows that your gross profit figure is accurate. Free state e file taxes A large difference between these percentages may show that you did not accurately figure sales, purchases, inventory, or other items of cost. Free state e file taxes You should determine the reason for the difference. Free state e file taxes Example. Free state e file taxes Joe Able operates a retail business. Free state e file taxes On the average, he marks up his merchandise so that he will realize a gross profit of 331/3% on its sales. Free state e file taxes The net receipts (gross receipts minus returns and allowances) shown on his income statement is $300,000. Free state e file taxes His cost of goods sold is $200,000. Free state e file taxes This results in a gross profit of $100,000 ($300,000 − $200,000). Free state e file taxes To test the accuracy of this year's results, Joe divides gross profit ($100,000) by net receipts ($300,000). Free state e file taxes The resulting 331/3% confirms his markup percentage of 331/3%. Free state e file taxes Additions to Gross Profit If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. Free state e file taxes The result is gross business income. Free state e file taxes If you use Schedule C-EZ, include the income on line 1 of the schedule. Free state e file taxes Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts. Free state e file taxes Prev Up Next Home More Online Publications
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