When you start entering your expenses, you’ll be asked to select the cost category under which you want to record your expenditure. In this article, we’ll discuss which expenses fall under the category of goods or trade goods.
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 from which your sales items are made.
That’s not all, because you must also record the packaging and transport materials for your goods under the trade goods.
What falls under ingredients and raw materials? 🌾🪨
Ingredients and raw materials are all the basic products from which you manufacture your product. For a chef, this ranges from the largest sacks of rice and potatoes to the smallest stock cube.
It goes a bit further, because actually all products that ‘run out’ and form part of the manufacture of your product or the provision of your services fall under this category.
Here, too, the cleaning products used in a car wash, the gel polish used by a nail stylist, the biscuits served with coffee at a trendy coffee bar, and even the nails used by a carpenter are included.
At Dexxter, we use the next rule of thumb for raw materials and ingredients:
Anything that is used up during the manufacture of a product or the provision of services falls under trade goods.
Some examples ✅/🚫
|
Situation |
Trade goods? |
Why? |
|
A market trader buys fruit which 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 pack his bread and cakes. |
✅ |
Packaging materials |
|
A plumber buys a hammer which he uses to install bathrooms. |
🚫 |
Small materials |
|
That same plumber buys screws and bolts to install that same bathroom. |
✅ |
Raw materials |
|
A domestic helper buys products to clean floors. |
✅ |
Raw materials |
|
An online seller of marbles buys bags and boxes to send his items to his customers. |
✅ |
Transport materials |
As you can see above, our plumber’s hammer is therefore not a trade good. Our plumber does, however, use that hammer at the customer’s premises; in a sense, that hammer is even necessary to install the bathroom.
But that hammer has not left our plumber’s business once he has finished at the customer’s premises. The screws and bolts, on the other hand, have; they were used in the customer’s bathroom and are now no longer part of our plumber’s business.
So we record the hammer as “miscellaneous small purchases” or a custom cost category. Whereas the screws and bolts are recorded as “goods”.
Inventory 🧾
If you have trade goods in your accounts, you must also keep track of your inventory. Here, the value of the inventory is mainly concerned. At the end of each year, you must enter your closing inventory.
This is the value of all your unsold trade goods. You carry this value forward to your next financial year, so that only the costs of the trade goods you have purchased are recorded in your accounts 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.
Everything at a glance 📋
Here is a brief summary of the costs that fall under the ‘trade goods’ category:
- products you have specifically purchased to sell (after processing)
- ingredients, raw materials… Anything that forms part of your trade goods
- packaging of goods
- transport materials for your goods
