I've started running a business, in terms of making something from raw materials, processing it, and then it becomes a product that can be sold to people.
- Receive Raw Materials
- Process those raw materials into a product
- Sell it to people with all appropriate sales tax collected.
On the accounting end of things, so far, it's been really just writing down what I purchased and tagging the transaction with either cogs or one-time startup costs.
Though I'd like to progress this to the accural accounting method.
I asked my friend (an accountant) about this and he told me the following about the place he used to work, and what would happen on the books during those times:
1. Receive Raw Materials
This is basically what I have already done writing down everything that I purchased to do the job.
1.1 COGS
2026-02-22 Tuesday's Supply
assets:raw materials:wood $16.00 ; cogs:2026_Q1 ;
assets:raw materials:nails $10.00 ; cogs:2026_Q1 ;
tax $1.56
equity:openingbalances
1.2 Startup Costs
2026-02-22 Al Lowes
assets:equipment:tools:saw $40.00 ; startup-cost:2026_Q1 ;
assets:raw materials:tools:hobbyhorse $100.00 ; startup-cost:2026_Q1 ;
assets:raw materials:tools:drill $40.00 ; startup-cost:2026_Q1 ;
assets:raw materials:tools:drill:bits $20.00 ; startup-cost:2026_Q1 ;
tax $12.00
equity:openingbalances
2. Process those raw materials into a product
2.1 Employee Compensation for Time for Working the Process:
I'm not sure what to do here; I'm the only employee, but I would imagine it has something to do with paying me as an employee for my time working on building the product. Something with hours worked at hourly rate.
2.2 Electricity Bills
Using a trusty KILL A WATT device to track KWHs incurred during the process and multiplying that by the electrical rate should do the job, and of course that could be placed in liabilities:accounts payable:electric.
And both these bills could be payed off later and it might look something like the following:
2026-02-23 Meter
liabilities:accounts payable:electric -$2.00 ; utils:electric ;
tax -$0.12
expenses:utils:electric
And later when the bill is paid off:
2026-02-26 Letric Company
expenses:utils:electric $2.00
tax $0.12
assets:cash:upstanding bank
2.3 When the product exists remove the raw materials and create the product in another inventory:
2026-02-27 Transfer Completed Product from Raw Materials to Product Inventory
assets:raw materials:wood -$8.00 ; Lets say I used half the wood.
assets:raw materials:nails -$5.00 ; Lets say I used half the nails.
assets:product inventory:cabinet_sm ; 1x cabinet
3. Sell it to people with all appropriate sales tax collected.
2026-03-03 Customer Purchase
assets:product inventory:cabinet_sm -$13 ;
assets:revenue:accounts receivable:cabinet_sm $20 ;
state-sales-tax -1.20
some-other-account-not-sure-what $5.80 ; not sure how to make this all come out to zero.
Please correct me where applicable, I am new to accounting.