The cost of goods sold for any business entity in any sector is the main factor to evaluate the economic health of the organization. The difference between sales and cost of sales refers to the gross profit or gross loss, the greater the difference the greater will be the impact on the health of the organization.
The components of cost of goods sold vary according to the nature of the business entity because for every business entity we have different nature of cost of goods sold.
The components of the cost of goods sold for a rental property may be the rentals, non-refundable security deposits, rents rates, and taxes paid relevant to the property or lease rentals and down payment if the property is on lease.
Rental properties can be categorized into a finance lease and operating lease as per the pre-defined rules set by the international accounting standards.
Calculation of cost of goods sold for a rental property
The universal formula in order to calculate the cost of sales regardless of any business is the value of opening stock of the business counted at the end of the previous period, plus the value of all the additions or purchases of the business for the current period less the value of closing stock value counted at the end of the current year.
The cost that cannot be included in the cost of sales
The cost of goods sold can only be included in the direct cost i.e the direct material, direct labor, and manufacturing overheads directly related to the product however indirect material, indirect labor, and other manufacturing overheads can never be a part of the cost of sales.
Care should be taken in order to apportion the correct amount of total cost into the cost of sale and other operating costs.
Nature of cost of goods sold for a rental property
The nature of cost of sales related to the rental property is all types of rental costs paid by the tenant to the landlord for the usage or occupation of the rental property such as rent, any type of non-refundable security deposit paid as well as the taxes rates and rents paid to the authorities levied on properties.
The cost of goods sold for rental property can also include any amount of brokerage commission paid to the broker.
Information for decision-makers
The cost of goods sold is an informative material for decision-makers such as for businesses in order to calculate the profitability of a rental property, for investors in order to calculate the profit margin in case of the investor deals in the business of real estate sector and in fact to the customers willing to deal in the property for rental purposes only.
The real estate business is one of the growing businesses in the world thus it is very important to well aware of the nature and breakup of the cost of goods sold.
Types of rental properties
Rental properties can be divided into residential and commercial. Residential properties refer to the properties taken on rent for household usage purposes however commercial properties are properties taken on rent in order to earn further income from the usage of the rented property such as rented premises in order to use it as an office, factory building, or land for agricultural purposes.
Taxes on rental property
Taxes are levied on a rental property by the authorities such as property taxes during the period of ownership and capital gain tax on the sale of the property. These taxes are usually at a lower rate for a rental property used for residential purposes however it is at a quite higher rate for properties dealt for commercial purposes.
The mortgage interest and tax depreciation deductions can also be allowed for the owner of the property or lessee of the leased property or in some cases to the lessor in a lease arrangement.
Impact of cost of sales on financial statements
The impact of the cost of sales on the health of financial statements is very crucial because this is the only factor that can make financials healthy while contributing a greater portion in profit margin, however, at the same time, it can weaken by contributing a small portion of the profit margin or even making organization sick while contributing gross loss.
Thus the conclusion of the whole article is that the cost of goods sold for a rental property is the main factor in order to calculate the profit-making efficiency of rental properties whether rented for residential purposes or commercial purposes.