Tax Accounting for Liquor Sold

In accounting, the purchase of liquor to be sold at a bar is considered an expense. Specifically, it falls under the category of “Cost of Goods Sold” (COGS) or “Cost of Sales.”

COGS represents the direct costs associated with the production or acquisition of goods that a business sells. In the context of a bar, it includes the cost of purchasing liquor and other beverages that are sold to customers. When the bar buys liquor from suppliers, it is recorded as an expense on the income statement, reducing the bar’s profitability.

Here’s a brief overview of how this would be recorded in the accounting books:

Purchase of Liquor: Let’s say the bar purchases $2,000 worth of liquor from its supplier. The journal entry would look like this:

Debit: Liquor Inventory (an asset account) – $2,000 Credit: Accounts Payable (a liability account) – $2,000

Sale of Liquor to Customers: When the bar sells the liquor to customers, the revenue from the sale is recorded separately on the income statement. The cost of the liquor sold is then deducted from the revenue to calculate the gross profit.

Debit: Accounts Receivable or Cash (depending on the payment method) – Amount of the Sale Credit: Sales Revenue – Amount of the Sale

Debit: COGS (Liquor Inventory) – Cost of Liquor Sold Credit: Liquor Inventory – Cost of Liquor Sold

It’s important for businesses to track COGS accurately as it directly impacts the gross profit and, subsequently, the net profit of the business. The goal is to manage the costs efficiently to maintain healthy profitability.