The Basics of Car Dealership Accounting

Car dealerships sell, lease, and service/repair new and used automobiles. They usually have showrooms and lots for displaying vehicles. Dealerships typically employ salespersons who work on commission. They negotiate with buyers to determine a final sale price which often includes the dealer’s purchase of the buyer’s current vehicle, referred to as a trade.

Many dealers use automotive point-of-sale software to guide customers from initial phone calls or walk-ins through the entire car buying and leasing process during the road-to-the-sale process. It prevents a customer from interacting with multiple staff members in different departments, slowing the process and creating frustration.

Car dealerships have unique accounting needs and car dealership accounting is unique. They need to handle complex double-entry accounting and be able to access financial reports quickly.

They must also learn to track inventories and other vital charges for all sales transactions. It can help improve profits and cash flow.


While sales and service are often the departments that get the most attention, your accounting office is also crucial to your business’s success. Keeping your dealership accounting department in tip-top shape will help you maximize profits. A well-functioning car dealership accounting office will save you a step ahead of the competition and poised to make a profit.

A key component of dealer accounting is ensuring that all cash flows are properly tracked and recorded. A dealer’s cash flow can be impacted by numerous variables, including contracts in transit (CIT); frequency of manufacturer incentive pay; floorplan payoff terms; accounts payable turnover; historical chargebacks, and more.

Managing all these moving parts can be challenging, especially in smaller dealerships where a single person might manage the entire accounting department. Fortunately, auto dealer accounting software has been designed to automate the process. With auto dealer software, you can track all sales, inventory, payments, and other financial transactions in a way that’s easy to understand and monitor.

These features may include integrated payment processing solutions, quoting/estimating systems, inventory tracking, customizable reports, etc. Some advanced software also includes e-signature technology for convenient, professional invoicing.

Expense Reporting

While sales and service may be the first departments that a car dealership owner thinks about when optimizing profit, it is also essential to have rock-solid accounting and bookkeeping practices. A high-functioning accounting department can save money and allow your business to grow and change positively.

One of the most common mistakes car dealerships makes is needing to reconcile their books each month appropriately. It can result in missed opportunities and misguided decisions, particularly with vendor relationships or if a creditor questions the dealership’s financial stability. Another mistake that car dealerships often must correct is correctly recording their expenses. It includes clerical salaries, dealer salaries, insurance, utility bills, vehicle depreciation, and other fixed expenses. Keeping track of all your spending might help you save money and decrease taxes.

Using the best accounting software for car dealers, you can keep track of every payment your company receives and efficiently prepare for tax season. You can also access archives of all invoices sent, making it easier to know where your cash is coming from. 

Inventory Management

From customer demographics to website and marketing campaign analytics, dealerships must understand what their consumers desire to identify the perfect car quickly and effectively. Using data-driven inventory management practices can help dealerships overcome industry challenges. Choosing the best inventory accounting method, whether LIFO, ALM, or specific identification, and utilizing valuation methods that align with your preferred method will ensure dealerships remain competitive and profitable.

Dealerships frequently choose the LIFO method when accounting for new inventory, as it allows them to defer income tax liability based on their most recent material costs, which lowers the annual total cost of goods sold and increases their net realizable value deduction. While this method would not benefit industries carrying perishables, it can be a significant advantage for car dealers that stock new vehicles in high volumes and have lower purchasing costs due to the constant flow of new inventory into their lots.

While LIFO may offer a tax benefit, it can be problematic for dealerships in periods of inflation. In these cases, dealers can be exposed to significant tax liability if their accounting method is not updated to account for rising prices. Inflationary accounting requires complex calculations and annual comparability adjustments to match cost with revenue accurately. The ALM method eliminates this problem, accounting for inflation model-by-model without annual comparison adjustments.

Time Tracking

When working in a car dealership, employees are juggling multiple tasks daily. Each person must be on the same page. Otherwise, the different departments could be working in silos, resulting in miscommunication and missed opportunities for the business.

For this reason, a car dealership needs to use efficient accounting practices when monitoring time. It includes a solid reconciliation process. Reconciliation helps keep all the numbers in sync and prevents inaccurate reporting. A streamlined reconciliation process can highlight areas where the dealership can cut costs and improve profits.

As a bonus, automotive accounting software, or car dealership accounting, can also help manage employee time and attendance.