Nonprofit Income Accounts Part 4: Merchandise Sales
Sometimes this can truly be a great idea. And it may be worth pursuing. Just proceed with full knowledge of what you are getting into. Selling merchandise involves a different type of accounting. In fact, it involves a lot of different activities.
Recording Merchandise Purchased for Resale
Say you want to sell mugs with the organization’s logo on them. You order the mugs and the bill goes to your organization’s bookkeeper. How does she record the purchase?
Hint: It’s not an expense. Instead the mugs should be recorded as Inventory, an asset on the balance sheet. The amount paid for the mugs becomes expense as the mugs are sold.
The matching principle in accounting says that you match revenue with the expense incurred to earn that revenue. Therefore with every mug sale, you transfer the cost of a mug from the Inventory account to an account on the profit and loss report called Cost of Goods Sold.
Accounts for Merchandise Sales
The Cost of Goods Sold account should be presented on the Profit & Loss report right after Mug Sales. That way you see a net number for sales minus cost of goods sold in the income section of the profit and loss report:
Mug Sales $50.00
Cost of Mug Sales $24.00
Gross Profit from Mug Sales $26.00
Options for Recording Inventory Sales
You will need to inform your bookkeeper about how many mugs were sold so she can move the proper amount of expense onto the profit and loss report. Your bookkeeper can record the reduction in inventory and related cost of goods sold expense using a journal entry. Or she can use inventory items in QuickBooks.
When used on a sales receipt, inventory items record both the revenue from the sale and the related cost of goods sold. Inventory items can save accounting steps, but they also require careful planning to set up and diligent oversight to maintain. Here is an article by Intuit on inventory in QuickBooks Online, Inventory Overview and Setup. For inventory in QuickBooks Desktop (and in general) see Setting Up QuickBooks Inventory for the First Time – Part I by Tim Grant. This article contains a lot of detail, but we liked it because it makes you think through the up front planning that needs to happen before you jump into inventory accounting.
Other Ways Inventory Can Decrease
Besides sales of mugs, inventory can also decrease through breakage, theft, or even writing off the mugs if they don’t prove to be a popular item. Managing inventory from an accounting perspective requires a lot of oversight no matter what method you use in QuickBooks.
Managing Physical Inventory and Inventory Sales
Physical inventory has to be stored somewhere until it is sold. It has to be transported to events or other venues where it can be sold. If you do online sales, it needs to be shipped to buyers. Storing, transporting and shipping inventory costs time and money. Be sure you figure these costs into your plan.
If you sell online, you need a shopping cart and a way to take payments. You may need to photograph your inventory so you can post pictures of it online. Your bookkeeper needs to know about any payment methods, such as PayPal, so she can include that information in the organization’s books.
Some states charge sales tax. 501(c)(3) nonprofits in Florida, for example, are exempt from paying sales tax on items they purchase for use in furthering the organization’s exempt purpose. However they are not exempt from collecting sales tax on items they sell. If your organization is in Florida and you want to sell merchandise, be sure you comply with sales tax collection laws.
By the way, sales tax is one more thing your bookkeeper will need to take care of. Not only recording sales tax collected, but also paying sales tax to the state and completing the required sales tax returns. Looks like your bookkeeper may need a raise for all this additional work she is taking on!
Unrelated Business Taxable Income
One executive director of a local arts organization recently told us she was going to solve her organization’s cash flow problems by opening a coffee shop. Our first response was to be careful of unrelated business taxable income!
If the merchandise you sell is not “substantially related” to the organization’s exempt purpose, you could be setting yourself up for income tax on the sales of unrelated merchandise. The IRS generally does not allow nonprofits to compete with for-profit businesses tax free.
A certain amount of taxable income, however, is allowed by the IRS, and may be a good thing for your organization. Just know ahead of time if the merchandise you want to sell will be considered exempt or taxable, and plan accordingly. You must file an additional tax return, Form 990-T, to report and pay tax on such income. Also your bookkeeping will need to be impeccable since you’ll want to keep track of taxable revenue and the expenses that can offset it!
Selling merchandise is a whole new line of business.
Merchandise sales, as you can see, represent a whole new line of business with a lot of moving parts, accounting rules, and possible income tax and sales tax requirements. Does your organization sell merchandise to raise money? We’d love to hear from you and share your experience and advice with our community!