Schedule C: Cost of Goods Sold
How to fill out the cost of goods sold part on Schedule C?
The cost of goods sold (line 4) is determined by completing Part III of Schedule C.
However if you have a business that does not sell a product, you do not have to complete line 4 or Part III. You must select the method you use to determine the value of your closing inventory (line 33).
The cost method (box a) is the most common and easiest method. The cost method means the value of your inventory is based on what it cost you.
How to determine the value of goods sold?
Whether you use the cost method or the lower of cost or market method to determine the value of goods sold, you can use the first in first out method (FIFO) or the last in first out method (LIFO).
What is FIFO?
FIFO means that the product that was produced or purchased first is the product that is considered sold first. This is the most common method used by small businesses.
What is LIFO?
LIFO means that the product that was last produced or purchased is the product that is considered sold first.
Basically, the cost of goods sold is the difference between your inventory at the end of the year (closing inventory, line 41) and the inventory at the beginning of the year (opening inventory line 35) with adjustments for purchases (line 36), labor costs (line 37), materials and supplies (line 38) and other costs (line 39).
The closing inventory of one year should be equal to the opening inventory of the next year.