There are several accounting procedures that can be used to reduce company income tax liability. Since the income tax rate is based on net profits as reported on the income statement, most methods are focused on reducing profits without negatively affecting cash flow. One method is through accelerated depreciation of equipment assets. This will increase expense to reduce profits. Yet another method is through inventory valuation methods to reduce gross profit.
Inventory Valuation and Affects on Gross Profit
Gross profit is determined by subtracting cost of goods sold from sales. Cost of goods sold is generally determined by inventory value. In fact the reciprocal general ledger account for inventory is the cost of sale. When a sale is posted to the books, the cost of sale is increased and inventory is decreased by the same amount. As an example, if a widget was sold for $100 and has an inventory value of $50, the sales journal entry would be.
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