What expense category are raw materials?

When you're running a business that uses raw materials, knowing how to categorize these costs is key to keeping your finances in order. Let's dive into where raw material expenses fit in your accounting and why they matter.

Classifying raw material expenses

Categorizing raw materials correctly helps you track production costs and understand your profitability. Here are the main ways to classify raw material expenses:

• Cost of goods sold (COGS): Raw materials used directly in producing the goods you sell usually fall under COGS.
• Inventory: If you purchase raw materials but don't use them right away, they can be considered inventory until they're used in production.
• Direct expenses: For materials consumed immediately without resulting in a stored product, like coffee beans used daily in a café, you might classify them as direct expenses.

Examples of raw material expenses

Understanding raw material expenses is easier with examples. Here are some common raw materials and how they might be recorded:

• Manufacturing materials: Wood for furniture makers, steel for car manufacturers, or fabric for clothing companies.
• Agricultural inputs: Seeds for farmers or feed for livestock producers.
• Consumables: Coffee beans for a coffee shop, flour for a bakery, or ingredients for a restaurant.

For instance, if a bakery purchases $1,000 worth of flour to bake goods for sale, this expense would typically be categorized under COGS.

Tax implications of raw material expenses

How you categorize raw materials can affect your taxes. Here are some key considerations:

• Deductible expenses: Raw materials categorized under COGS are usually deductible when calculating taxable income.
• Inventory accounting: Materials held as inventory may require you to track their value for tax purposes, including any changes over time.

Properly recording raw material purchases ensures you can claim all eligible deductions and comply with tax regulations. Be sure to consult a tax professional to understand how these rules apply to your business.

Let Ramp automate your expense process

Managing raw material expenses doesn't have to be a hassle. With Ramp, you can automate the categorization, tracking, and management of these costs. Get real-time insights into your spending and make better decisions without the manual work.