Consider the following items before figuring your gross profit.
Gross receipts. At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. You may find it helpful to use cash registers to keep track of receipts. You should also use a proper invoicing system and keep a separate bank account for your business.
Sales tax collected. Check to make sure your records show the correct sales tax collected.
If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts.
If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income.
Inventory at beginning of year. Compare this figure with last year's ending inventory. The two amounts should usually be the same.
Purchases. If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc.) be sure to remove them from the cost of goods sold. For details on how to adjust cost of goods sold, see "Merchandise withdrawn from sale" in How To Figure Cost of Goods Sold.
Inventory at end of year. Check to make sure your procedures for taking inventory are adequate. These procedures should ensure all items have been included in inventory and proper pricing techniques have been used.
Use inventory forms and adding machine tapes as the only evidence for your inventory. Inventory forms are available at office supply stores. These forms have columns for recording the description, quantity, unit price, and value of each inventory item. Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. These forms will help satisfy you that the total inventory is accurate. They will also provide you with a permanent record to support its validity.
Inventories are discussed in Accounting Periods and Methods.
Information courtesy of the Internal Revenue Service.
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