.svg){kind=small}
When you start entering your expenses, you’ll be asked to select the cost category under which you want to record your expense. In this article, we’ll discuss which expenses belong in the trade goods category.
What are trade goods? 📦
You purchase goods that you later sell directly to customers. This is the most obvious example of trade goods. However, goods that you sell indirectly to your customers are also trade goods, such as the ingredients or raw materials that make up your products.
But that’s not all, because you must also record the packaging and transport materials for your goods as trade goods.
What counts as ingredients and raw materials? 🌾🪨
Ingredients and raw materials are all the basic products used to make your products. For a chef, this ranges from the largest bags of rice and potatoes to the smallest bouillon cube.
It goes a bit further, because essentially, all products that “run out” and are part of manufacturing your product or providing your service fall under this category.
This also includes the cleaning supplies at a car wash, the gel polish used by a nail technician, the cookies served with the coffee at a trendy coffee shop, and even the nails used by a carpenter.
At Dexxter, we apply the following rule of thumb for raw materials and ingredients:
Anything that is used up during the manufacture of a product or the provision of a service is considered trade goods.
Some examples ✅/🚫
|
Situation |
Trade goods? |
Why? |
|---|---|---|
|
A market vendor buys fruit that he sells directly to his customers at the market. |
✅ |
Goods that he resells directly. |
|
A baker buys flour, milk, and eggs for the cakes he makes and sells to his customers. |
✅ |
Ingredients and raw materials |
|
That same baker buys cake boxes and bread bags to package his bread and cakes. |
✅ |
Packaging materials |
|
A plumber buys a hammer that he uses to install bathrooms. |
🚫 |
Small supplies |
|
That same plumber buys screws and bolts to install those same bathrooms. |
✅ |
Raw materials |
|
A housekeeper buys products to clean floors. |
✅ |
Raw materials |
|
An online seller of marbles buys bags and boxes to ship his products to his customers. |
✅ |
Transportation materials |
As you can see above, the plumber’s hammer is not a trade good. However, the plumber does use that hammer at the customer’s home; in a sense, that hammer is even necessary to install the bathroom.
But that hammer hasn’t left the plumber’s company once he’s finished at the customer’s home. The screws and bolts, on the other hand, have; they were used in the customer’s bathroom and are no longer in the plumber’s company.
So we record the hammer under “small purchases of all kinds” or a custom cost category. Meanwhile, the screws and bolts are recorded as “inventory”.
Inventory 🧾
If you have trade goods in your accounting records, you must also keep track of your inventory. In your accounting, this primarily concerns the value of those goods. At the end of each year, you must enter your closing stock.
This is the value of all your unsold trade goods. You carry this value over to your next fiscal year, so that only the costs of the trade goods you purchased are recorded in your books in the year you actually sell them. This provides a clearer picture of your overall profit.
Want to know more?
Find more information about inventory in this article from our learning center.
A quick overview 📋
Here’s a little recap of the costs you can list under ‘trade goods’:
- products you’ve specifically purchased to resell (after processing)
- ingredients, raw materials… Anything that’s part of your trade goods
- packaging materials for your goods
- transportation materials for your goods
