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this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900   Minus: Items withdrawn for personal use 2,650 283,250 Goods available for sale $321,095 Minus: Inventory at end of year 32,955 Cost of goods sold $288,140 Items To Check Consider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

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