Accounting 204: Sales Categories

There is no way to work on the next steps without specifics. I am going to use the numbers from my business. Hopefully this information will be generic enough that it can apply to any business. At least that is my hope. The numbers are mine and are real so you can have a realistic picture of what happens in a business of this type and size.

The next step in building out the accounting system is to break out the sales to different categories. Why not just keep all sales in one category? You could. There is no harm in doing that, however I like the information that accounting can provide. For example I want to know what is my most profitable category and look for opportunities that might increase the sales or reduce the expenses of that category. A specific example from my business is the sales category of copy services. I had a gross profit of $2,343 in copy services in all of 2015. That is not very much compared to other categories. Now I can either try to grow that number by increasing sales or I can reduce expenses or I can leave it alone and focus on other sales categories. If I wanted to increase sales I might consider how I would do bigger and better jobs and how I would market or advertise to get those better jobs. That might mean purchasing or leasing new equipment. For now I see this as an opportunity that I may want to pursue in the future. I will choose to maintain the service I have and do nothing more. This is how accounting helps me make these decisions, but the decisions are not automatic. They still require thought and planning. It is not an engineering exercise, but an art project.

So here are my sales category numbers from last year.

Revenue is how much cash I brought in.

Direct expense is the direct cost for delivering that sale. For example the cost of a stamp in the stamps category. We do a lot of work in sorting mail but I do not count that as a direct expense because we can do it when we have time and we certainly will stop to help customers in the middle of sorting mail.

Gross Profit is the difference between the Revenue and the Direct Expense.

Gross Profit percentage is the percentage of profit from a sale. Because Mailbox services has no direct expense (neither does UHaul) it is 100% profit. This is important because increasing sales in a low margin sales category does not produce as much profit as increasing sales in a high margin sales category.

Percentage Profit contribution is the percentage of all gross profit that the particular category produces. I have ordered the sales categories in order of this.

I have broken out the shipping in to individual shipping providers. Shipping is the second largest contributor to gross profit. Within that category I can see my largest revenue and gross profit contribution is from metered mail (United States Post Office) even though it is the lowest margin of all the shipping categories.


In addition to the decision I made about copy services I have also looked at the level of effort and the results of selling online. I could try and improve those small numbers, but I am shutting that down this year. I could revisit it again later. What are some other decisions I have made based on this information?

  1. Stamps are low margin, but worth doing well. Because of that we have decided to have a nice display and try and keep at least one sheet of every available stamp on the counter.
  2. Shredding is highly profitable from a percentage point of view. We need more sales. We placed a very large ad in the local yellow pages to see if that will increase sales. We also decided to do our own shredding rather than paying a service. It could save us $1000 this year.
  3. Passport photos are highly profitable. We have applied to become a passport agent (we are on a waiting list) I will visit the passport office in LA and see if we have options for providing extra service. We keep a spare printer and paper in inventory with local sources for supplies so we never will be without the passport supplies.
  4. Gifts are a unique category. I believe it should be 10% of our sales and 90% of our marketing. Our focus is not on what sales, but what makes the store look better. I think we are headed in the right direction and it confirms our strategy that the gross profit contribution is over $13,000. I expect that to nearly double which will make it as profitable as notary and individual shipping categories.
  5. All shipping combined is still our second largest category with Post Office shipping increasing. We raised prices on some of our post office prices. We do not want to be the price leader there. We need to look at ways to improve the smaller shippers OnTrac and DHL.

So these are some of our insights from the numbers. I am going to add these to our new accounting system.


Here you can see the chart of accounts with the new income categories. When you add the accounts QuickBooks will try and order them alphabetically. You can click on the little icon next to the name and drag the account up or down, ordering them the way that you would like. I like to put them in the order of importance. There is no reason to do that, but when I create reports it keeps the accounts in the order I like.

Now I am going to create a general journal entry and memorize it. This is money that is coming in from sales in order to purchase goods and services. I am going to have all of that money go into one account called cash. Now of course some will pay with a credit card and some will pay with a check. I will show you how I handle that later. For now I am assuming that all sales go into an account called cash. That label cash might be a little misleading. It might have been better called Cash Drawer or something like that. Anyway, on to creating a General Journal entry. (Under activities in the chart of accounts)

BTW these are real numbers for a day in the store.


Here I have all of the sales categories in the general journal entry even if there were no sales in that category. When I memorize the entry it will always have all of them and I can quickly enter all of them, even those with no sales.

If you are really paying attention you will see a new account “Sales Tax Payable” This is a current liability. I collected the cash for sales tax so it will affect the cash I have on hand, but I have to set it aside to make sure I know how much I will pay the government tax collectors. I will write more on that later. The point is that I have to account for all of the cash (money) I received. I have another post about taxes. My POS tells me how much I collected in sales tax.

My POS (point of sale) software doesn’t have all of this information in one place for example my POS separates color copies from black and white copies. I don’t distinguish and I just combine the two. My POS combines Passport Photos and Shredding into one category office services. I separate them. All of the information can be quickly retrieved and making this daily entry in a memorized transaction is pretty easy. Mistakes I have made is getting the dates wrong or I will get the information after I have already helped some customers and my numbers don’t add up. Fortunately I can’t save a Journal entry if it is not balanced. I do not have to do these every day. Sometimes when I am out of town I will make a single entry for multiple days. I like doing it everyday just to stay on top of it all.

What are other Sale-other? It is the catch all for things I don’t care to track. For example any office products or services that happen occasionally fall in that category. Some of the other stores in the Franchise have huge sales in office products. If I ever got there I could always add that category. I am not there.

Now let’s look at our important reports


Our Net Income is really high. That is because we haven’t entered in all of our expense (next post) Also notice in our balance sheet that there is a lot of cash (true) and another liability Sales Tax Payable. In the next post we’ll look at expenses which is a little more difficult.

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