Allocate inventory write-off to equity account for personal use of stock

I would like to be able to use inventory write-offs to allocate inventory to personal use, as per this discussion (for example, by allocating it to the Funds contributed or Drawings subaccounts of my capital account). Until now I have been using journal entries for this, but it necessitates looking up the costs of the goods and remembering to add the VAT for the journal entry, which adds work and room for error.

@Tut suggests using a clearing account, which would allow for automatic calculation of the costs but would still involve several more steps and an extra account. Being able to select the capital subaccount from the Allocation drop-down menu would simplify the process and reduce the room for error.

Could this be considered for the Ideas category, please?

Perhaps another useful addition would be to allow allocation to an employee clearing account.

I understand that write-offs are used for broken or expired items. Own usage is normally done by issuing an internal VAT invoice.

I have moved this into ideas.

Those are possible uses. But inventory write-offs can be used for other non-revenue disposition, too. For example, inventory given away for marketing samples or used for internal operations.

That would depend on local tax law and is definitely not a universal principle.

@GrahamvdR, the solution to your problem is not in write-offs, as this solves this minor problem by introducing much bigger problems.

You should create a customer account for your owners/employees.

Then you have two options here:

A. Create a non-inventory item (owners discount mapped to an equity account; or employees discount mapped to an expense account) and apply it to each invoice. (I don’t prefer this until you can map non-inventory items to control accounts) but it works if you don’t want to know who took how much.

B. Invoice the owner or the employee in full, then create a zero valued receipts to offset their receivable balance to their employee / capital account. (Which my preferred method in this current setup)

Write-offs are designed for shrinkage, obsolescence and theft – basically things you cannot control, and not for owners (even worse, employees) “taking” things and having the accountant “deal with it” using write-off, the inventory is there to be “sold” even if it’s at a 100% discount.

I am completely opposed to this idea because this will systematically enforce bad practices and lack of control over inventories (which is already near impossible to perfect) and I don’t want my users to be able to work their way around proper procedures.

Also, you should not use receivable write-offs because it will get you in trouble with tax authorities.

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@Ealfardan, your objection is rooted in personal preference rather than any accounting principle. @GrahamvdR’s suggestion merely allows drawings to be taken in kind at their current asset value. That is a perfectly acceptable accounting transaction.

This would be pointless. The entire purpose of the suggestion is to manage inventory. You cannot do that with non-inventory items.

Furthermore, there was no suggestion to apply this to employees. So please do not bring them into the discussion.

A zero-value receipt would not offset a balance in Accounts receivable (nor in Employee clearing account). You would need to include a negative line item posted to the payer’s subaccount. The end result of that would be the same as the proposed direct write-off.

That is very limited view of inventory write-offs, which can be used for any non-revenue reduction of stock. You also overlook the fact that most Manager users are not accountants, nor are they asking an accountant to “deal with it.” They are entering transactions for their own businesses. And it completely legitimate to record removal of inventory for private usage as a drawing.

The suggestion is not to be writing off receivables, but to write off inventory that will not be sold. You are the one who introduced the idea of turning such transactions into receivables. Whether there are tax issues depends on local law. It is true that in some jurisdictions such a removal would be considered a taxable event, but not in all jurisdictions. In that case, the write-off form includes the possibility of applying a tax code. If it is used correctly, no one is going to get in trouble with tax authorities.

Your preference for how you control your users’ behavior is not a valid reason to preclude acceptable accounting transactions. There is a valid use case for @GrahamvdR’s suggestion. If it is implemented and you don’t want to use it, don’t.

No matter how you justify it @tut, write-off will never equate to a stock issue.

Write-off is a very specific accounting term which is used to record a “loss or impairment of value.”

Decrease in inventory because of issue whether it’s a sales, a manufacture, or whatever transaction it may be is never a write-off.

The terminology is very important here since it is used to differentiate between two completely different asset remeasurement methods that differ in the way they are controlled.

One of them: “issue”, is a proactive control whereby you process the decrease in stock in a controlled manner.

The other: “write-off”, is a reactive control that deals with the information mismatch after the error unknowingly took place.

I know manager has no concept of “issue” or “receipt” of stock, and I understand it’s a design choice to reduce the processing time by integrating those into the invoices abd receipts, which is fine by me. But this write-off deal is a huge mix-up of two completely separate processes, which isn’t a design choice, it’s just wrong.

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@Ealfardan, now you are down to quibbling over whose definition of write-off or issue you want to use. In its broadest definition, a write-off is a reduction of an asset associated with its inability to produce future income. You seem to prefer a definition that only includes events beyond your control, such as spoilage, theft, or obsolescence. I would accept all those.

I would also contend that removal of inventory from stock for private use by an owner also reduces the asset, because you obviously cannot sell it for future income. Likewise, conversion of inventory to marketing samples reduces the Inventory on hand asset. So I do not see any significant difference. There is no financial difference between writing off an item and selling it at 100% discount (your example).

I am also not alone. As one example, Quickbooks specifically treats conversion to marketing samples as an inventory write-off.

Some explanations here

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No it doesn’t. It gets allocated to ‘Advertising and Promotion’

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@VACUUMDOG, both your examples use a journal entry to credit the asset account holding inventory. In Manager, that is Inventory on hand. An inventory write-off in Manager credits this asset account and debits whichever account you allocate the transaction to. Your first example debits the drawings account. The second debits a promotional expense account. Those are exactly the same results accomplished with an inventory write-off in Manager.

In the end, every accounting transaction can be reduced to an equivalent journal entry, so that is how instructional books and web sites often present them. Manager uses specialized adaptations of journal entries to tailor entries more easily to the situation and reduce the need for inexperienced users to determine on their own what accounts to debit and credit.

I don’t know whether you intended to or not, but your post reinforces my position.

In the Quickbooks case, the accounting transaction being accomplished is an inventory write-off. Advertising and Promotion is merely the expense account selected for allocation of the write-off in the Quickbooks documentation example. This is precisely how you would do the same thing in Manager.

In my opinion

  • inventory write off" is different to
  • supply to a related party.

The important difference is tax deductibility

  • spoilage, loss, supply of samples; are all tax deductible business expenses
  • Personal use by owner; is not a business tax deductible expense.

An owner can buy stock from a business at arms length value. In doing so the owner pays VAT/GST

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Thanks @Tut for making a case for this idea more eloquently than I could have.

Agreed. Inventory write-offs allow the user to apply a tax code to the transaction, which is what I would do if I was allocating it to an equity account for personal use.

Earlier in the year @lubos wrote in another topic:

(Emphasis is mine.)

I am not an accountant, so perhaps for me the term “inventory write-off” does not carry such a specific meaning as it does for some others here. What I would like to achieve is to be able to allocate inventory for personal use to an equity account, and have Manager do all the cost calculations itself. I don’t really mind if this is called “inventory write-off” or something else altogether. Currently all the methods that I’ve tried or have been suggested either involve manual look-up and input of costs or extra clearing accounts and more steps. The Inventory write-off transaction type seems to accomplish what I want perfectly, except that I can’t select the equity account for the allocation. As far as I can tell, all reporting obligations to the tax authority will be met, provided I select the appropriate tax code for the transaction (which would still be the case if I was using a journal entry or any other method).

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Perhaps one solution would be to change Inventory write-offs to Inventory allocations or something similar, to avoid upsetting those who have a very specific interpretation of the term that is not met by some of these requested uses. Then users are free to create their own expense accounts for the allocation, and could call those whatever they want, such as “Inventory write-off”, “Inventory damage write-off”, “Theft write-off”, etc.

@Tut what are you saying? Are you suggesting that Manager should copy Quickbooks from now on? That makes no sense because I can spend the whole day telling you why QuickBooks are wrong in everything they do.

Quickbooks is an inferior product that you shouldn’t use as a benchmark for manager, and instead of looking down, you should look up or at least ahead when you benchmark.

Also not being able to issue stock at cost is a valid problem, it’s solution is never by reinventing the wheel (QuickBooks style) but rather by either:

  • Use multiple prices lists like every decent accounting system out there (doesn’t include QuickBooks), or even better
  • Use a predetermined discount rate for employees and owner regardless of actual cost (Like every properly managed business would do)

Also applying your logic, we can also extend write-offs for sold inventory item since selling reduces the asset. Even better, issuing materials for production reduces my raw materials so why not just write them off instead of going out of our way to create an MRN and then issue stock and then create an MO that will convert my raw materials to finished products.

Accounting jargon is not like your everyday speech, we use different terms to distinguish between different things in nature or in treatment.

It is not clear to me how inventory write off could accurately record the business transactions taking place. For example lets assume

  • an owner gets the business to buy a dozen buns
  • 2 for the owner and 10 for the business
  • Buns cost $0.50 each plus 10% GST
  • The business owner chooses not to pay in cash but just run a tab

In Manager that would mean
When buying the buns

After which the summary screen would be (we are starting up and this is our first transaction)

Now the owner can collect his 2 buns. At cost in this case

After which the summary screen is

Note

  • Profit & loss neutral effect of using business to supply Owner 1 with buns
  • Business has 10 buns on hand and net GST liability of only those 10 buns
  • Owner 1 paid bun cost price including GST for buns Owner 1 used for personal use

Perhaps I’m just a bit slow but I struggle to see how it is envisioned this process can be replicated using inventory write off

Looks like I’m just a bit slow.
The books would balance.
To simulate being able to select a capital account in inventory write offs a clearing equity account can be used

When Owner 1 collects their 2 buns, using inventory write off
07 Owner 1 Personal use buns - via write off work around

As we can not currently select a capital account in the above transaction I used a temporary clearing account above, moving the funds out of there immediately via

The net effect on the summary page is

Note

  • net effect on profit and loss is zero. In this case the activity does not register on the P&L
  • Inventory shows jus the 10 business buns with associated GST/VAT
  • Owner 1 capital account shows he bought 2 buns including GST/VAT

I still do not like the terminology but it does work

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Thanks for this worked example, @Patch. As I mentioned above, I’m not at all set on the terminology. It just seems like the most efficient mechanism to achieve what I want, and if the terms change that’s fine by me.

I learned something new from your example receipt:

It hadn’t occurred to me to include the entry for the capital account in the receipt like this. However, it doesn’t get around the issue of having to manually find and input the cost price. This may seem trivial in simple test cases like this, but in my business nearly all my inventory is imported, so I have huge currency fluctuations and multiple freight-in costs from different suppliers in different currencies that contribute to the costs of goods. I use an external spreadsheet to calculate all my sales prices, as inflation makes Manager’s reported costs of goods useless as a basis for doing this. But what it also means is that it works to my advantage to be able to purchase goods for personal use at Manager’s calculated cost price, rather than the market retail price or even the retail price less a fixed discount. I know that I can just check the Average cost for the item in the Inventory Items tab, but that still involves several more steps and gets quite onerous if there are lots of items. Plus I need to remember to multiply the cost by 100% plus the tax percentage when I enter it [Edit: because I had been using journal entries, which are always tax inclusive. Using your method or some of the others suggested would mean I wouldn’t have to manually add the tax]. Much simpler would be to just use an Inventory write-off (or the same kind of transaction by another name), select the inventory items and their tax codes, select the equity account for the allocation, and let Manager take care of the rest.

No. Don’t put words in my mouth. I used the example found the fastest in an internet search. It happened to be for one of the most widely used accounting programs in the world.

I wasn’t benchmarking.

Neither example is the same, and you know it. Your perspective about inventory write-offs was over a narrow viewpoint on terminology. These two examples are completely different types of transactions involving many more parameters. You cannot assert that my wider definition of write-offs includes such things.

This has been in the ideas category for three years already: Inventory Write-off tab modifications. If you visit that link, you will see it was proposed by one forum moderator and supported by two others.

The fact that Manager has a separate tab for inventory write-offs but requires journal entries for write-ons (upwards adjustments) has never made a lot of sense. It is just an artifact of how the program developed. But if that tab were expanded in scope, it would be easy to include different types of inventory adjustments with terminology palatable even to @Ealfardan.

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