Profit Calculation: Cost, Expenses, Discounts, Bonuses, Debts, and Returns

In the daily operations of a retail store or retail chain, various transactions take place continuously: cash and cashless sales, cumulative discounts, bonus redemption, the sale and redemption of gift certificates, receiving new inventory shipments, shipping goods with deferred payment, and processing customer returns.

This can raise several questions:

• «Why does the software show this particular profit amount?»,
• «How exactly does Torgsoft account for the cost of goods when purchases were made at different prices?»,
• «Why doesn't the revenue in the cash register match the financial result in the report for the selected period?»
• «How do inventory write-offs and acquiring affect the final profit margin?».

Torgsoft's analytical features are designed to automatically consolidate primary inventory and financial documents into a unified management accounting system, allowing business owners to assess the actual profitability of their operations.

1. Basic Concepts and How Profit Accounting Works in Torgsoft

To interpret analytics correctly, Torgsoft distinguishes between several financial indicators:

• Revenue (sales revenue) — the amount of money received from selling goods or services, less customer refunds.

• Gross profit (product profit / margin) — calculated as the difference between sales revenue (including discounts granted) and the cost of goods sold, adjusted for returns, write-offs, and bonus redemption.

• Net profit (final profit) — gross profit minus all operating and financial expenses incurred by the business during the selected period, taking into account the gift certificate balance.

When Profit Is Recognized: Accrual Accounting

Unlike simplified cash-basis accounting, Torgsoft is a management accounting system in which profit from goods is recognized when they are shipped (sold), rather than when payment is received in the cash register or bank account. A sale records the transfer of ownership of goods and the recognition of revenue, even when goods are sold on credit or with deferred payment.

2. Components of Profit Calculation and Their Impact on the Result

The basic formula for gross profit in Torgsoft's analytical reports (particularly the «Analysis — Period» and «Summary Report for the Period» features) is as follows: Gross Profit = Sales Amount - Cost of Goods Sold - Returns Amount + Cost of Returned Goods - Cost of Write-Offs - Inventory Shortages - Bonus Payments.

Overall net profit is calculated by adjusting gross profit for operating expenses: Net Profit = Gross Profit - Operating Expenses + Gift Certificate Balance.

2.1. Cost of Goods and Calculation Methods

The cost of goods sold is the main expense component when calculating profit margins. In the software settings («Settings» — «Options» — «Accounting»), the business owner selects one of two methods for calculating the cost of remaining inventory and outgoing documents:

• Last Purchase Price (Last Purchase Price):

• The cost of all available inventory and outgoing documents in the current open period is set equal to the latest purchase price from the incoming invoice.

• If the purchase was made in a foreign currency, the cost is recalculated using the current exchange rate in the system or the exchange rate specified in the incoming invoice.

• With this method, cost values are calculated only within the open period. Therefore, when moving to a new month, the cost of goods for the previous period must be calculated.

• By Delivery Batches (FIFO — First In, First Out):

• The cost of goods is deducted sequentially from the earliest batches based on their receiving dates.

• The cost of remaining inventory is displayed as the average purchase price of the batches actually in stock.

• By accounting center: the cost of goods is calculated separately for each accounting center, allowing profitability to be analyzed for individual stores and warehouses.

• Including internal transfers: when goods are transferred between retail outlets (accounting centers), the software takes into account the cost of the corresponding delivery batch during the internal transfer, ensuring more accurate profit calculations.

Impact of Negative Stock Balances («Selling Below Zero»)

If the system allows goods to be sold when no actual stock is available (negative inventory balances), the software cannot identify the purchase batch. In outgoing sales documents, the cost is recorded as UAH 0.

• Consequence. During the period when goods are sold with negative stock balances, gross profit will be temporarily overstated by the full value of the goods sold. After the goods are received and recorded through an incoming invoice, the cost must be recalculated to apply the correct purchase price and restore accurate profit figures.

2.2. Additional Invoice Costs and Business Operating Expenses

Two types of expenses affect the final net profit:

• Expenses Included in the Cost of Goods (Additional Purchase Costs):

• Delivery, customs duties, customs clearance, and packaging costs added to the incoming invoice on the «Invoice Expenses» tab.

• These costs are allocated per unit of goods (in proportion to price or quantity) and form the recorded inventory cost.

• Such expenses are deducted gradually — when each unit is sold, through the increased cost of goods sold.

• Business Financial Expenses (Operating Expenses):

• Premises rent, utilities, cash collection, communication services, and general business needs.

• These are recorded through «Financial Document» and linked to the relevant financial analysis categories marked «Include in Expenses».

• These amounts are deducted in full from gross profit for the corresponding period in the «Analysis — Period» report.

2.3. Discounts, Bonus System, and Gift Certificates

Discounts (Cumulative, Loyalty, Manual, Promotional)

Any discount reduces the final selling price of a product. The discount is recorded at the time of sale and directly reduces sales revenue and the profit margin on the receipt.

Bonus System

The software treats bonuses awarded to customers as deferred discounts.

• When Bonuses Are Awarded. Bonuses are recorded in the customer's balance and adjust revenue calculations in certain employee incentive reports.

• When Paying for Goods with Bonuses. Paying for a receipt with bonuses does not generate an actual cash inflow. Therefore, the amount paid with bonuses is deducted from revenue and gross profit in the «Analysis — Period» and «Summary Report for the Period» reports. This prevents the recognition of «paper» profits that are not supported by cash flow.

Gift Certificates

Gift certificate accounting depends on how certificates are configured in the software:

• If a certificate is accounted for as money or goods and sold at face value (UAH 1,000 for UAH 1,000), selling goods against that certificate generates normal revenue and profit.

• If a certificate is sold at a discount (for example, a certificate with a face value of UAH 1,000 is sold for UAH 800), a difference arises. To reflect this correctly in the «Analysis — Period» report, the «Certificate Balance» (Value of Certificates Sold - Value of Certificates Redeemed) is calculated and used to adjust the company's final profit.

• Customer Returns. When a product is returned, the software reduces revenue by the refund amount (including the discount) and restores the cost of the returned goods to inventory, reducing the cost of goods sold for the period.

• Write-Offs of Defective Goods and Inventory Shortages:

  • The cost of written-off goods (damage, defects, or internal use) represents a direct loss.

  • In the «Analysis — Period» report, the cost of write-offs is deducted from gross profit.

  • Inventory count results adjust profit according to the following formula:

  • Shortage Amount = Write-Off Amount - Inventory Reclassification Amount

  • The resulting net shortage amount is deducted from gross profit.

Because management accounting profit in Torgsoft is recognized on the date of the outgoing document (shipment), the status of settlements with customers or suppliers does not change the gross profit already calculated:

• Selling to a VIP Customer or on Credit Using an Outgoing Invoice. Profit is recognized on the sale date. When the customer subsequently repays the debt and pays money into the cash register, the software creates a financial transaction recording the debt repayment. This transaction increases the cash balance but does not recognize profit a second time.

• Settlements with Suppliers. Paying a supplier for delivered goods settles accounts payable and is not a business expense because the funds were converted into inventory.

Answers to Frequently Asked Questions

The cash register report («Daily Cash Register Report») shows only the actual movement of cash and cashless funds through the cash register during the day (cash-basis method). The «Analysis — Period» report calculates the financial result using the accrual method: it accounts for the cost of shipped goods, deducts operating expenses by financial category, and includes write-offs, shortages, and bonus payments.

The most common reason is that the cost of goods has not been calculated. If the cost is missing, the software may show overstated profit.

Another reason is selling goods with negative stock balances («selling below zero»). When no received inventory batch exists, the cost of goods sold is set to UAH 0, artificially increasing the profit for those items.

Possible explanations:

1. Significant amounts of slow-moving inventory were written off during the period, or an inventory count identified a large shortage.

2. Large operating expenses (rent, advertising, salaries) were entered into the system through financial documents marked «Include in Expenses».

3. Customers frequently paid using bonuses or gift certificates that had previously been sold at a discount.

4. Step-by-Step Checklist for Investigating Potentially Incorrect Results

If you suspect that the software is calculating profit incorrectly, follow these verification and diagnostic steps:

1. Open the «Analysis» — «Period» window.

2. Click «Print Negative Stock Balances for the Period».

3. If any products appear in the list, record their receipt using an incoming invoice or correct errors in the inventory documents.

1. Go to «Settings» — «Options» — «Accounting» tab.

2. Check the selected method: «Last Purchase Price» or «By Delivery Batches».

3. If your retail chain frequently transfers goods between warehouses, make sure the «By Delivery Batches Including Internal Transfers» method is selected.

1. In the «Analysis» — «Period» window, select the required month and click «Recalculate Cost».

2. For a comprehensive reset, run the service operation under «Settings» — «Options» — «Service» tab: «Clear Product Movement Information and Recalculate Cost».

1. Open «Payment» — «Balance by Financial Analysis Categories».

2. Review the category tree and make sure that transactions affecting only balance accounts (debt repayments, equipment purchases, cash collection) have not been assigned to expense categories marked «Include in Expenses».

1. If a customer return is timestamped earlier than the original sale of the same product on the same day, the link between cost records may be disrupted.

2. Go to «Settings» — «Options» — the «Service» tab, and click «Correct Sales Creation Times».