By Norma Wahnon
Copyright 2012 Norma Wahnon
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From Form 1040, Schedule C, the gross income for a business is determined by the formula:
Gross Income = Sales – Cost of Goods Sold + Other Incomes
The amount of sales (or income) for a small business can be recorded using either the cash method of accounting or the accrual method of accounting.
Figure 1: Profit or Loss from Business – Form 1040, Schedule C
Regarding the cost of goods sold, Lines 35 through 42 of Form 1040, Schedule C present the formula to determine the cost of goods sold. In a simplified form, the formula for cost of goods sold is:
Cost of Goods Sold = Beginning Inventory + Purchase – Ending Inventory
Figure 2 illustrates the process of calculating the cost of goods sold using lines 35–42 of Form 1040, Schedule C.
Figure 2: Figuring the Cost of Goods Sold, in Form 1040, Schedule C, Line 35 – 42