What expense category does buying inventory come under?

Buying inventory is a regular part of running your business, but figuring out how to categorize it can be confusing. Let's break down where inventory purchases belong in your financial statements and why it matters.

Classifying inventory expenses

When you purchase inventory, it's initially recorded as a current asset on your balance sheet because you intend to sell it for revenue. Once you sell the inventory, its cost moves to your income statement under cost of goods sold (COGS). Key classifications include:

• Current asset: Inventory you're holding for sale.
• Cost of goods sold (COGS): The direct cost of inventory you've sold during a period.
• Operating expense: Indirect costs related to selling inventory, like storage fees.

Examples of inventory expenses

Understanding how inventory expenses appear in your accounting can help clarify the process. Common examples of inventory expenses include:

• Raw materials: Costs of components you use to produce goods.
• Purchased merchandise: Items you buy to resell.
• Work-in-process: Costs of goods that are partially completed.
• Finished goods: Products ready for sale.

For instance, if you purchase $10,000 worth of merchandise to resell, you would record this amount as inventory on your balance sheet.

Tax implications of inventory expenses

Handling inventory expenses properly is important for your taxes. Here are some key points:

• Deducting COGS: You can deduct the cost of inventory you've sold from your taxable income.
• Inventory methods: You need to track and value your inventory accurately at year-end. Choose a method like FIFO, LIFO, or average cost for tax reporting.
• Inventory write-downs: If inventory becomes worthless, you may write it down, affecting your taxable income.

Being proactive about these tax implications can help you stay compliant and optimize your tax situation.

Let Ramp automate your expense process

Managing inventory expenses doesn't have to be complicated. Ramp can automate the categorization, tracking, and management of your inventory purchases. With real-time insights and seamless integration with your accounting tools, Ramp simplifies expense processes so you can focus on growing your business.