We just completed a year-end inventory in our office and there are two items that I took home out of inventory for personal use. When I do an Inventory write off, there is not an option for any equity accounts. I am not purchasing the products from myself so a Sales Invoice then a journal entry doesn’t seem like the right choice. How would be the best way to accommodate this?
In my opinion the correct way to enter this is for you to buy them from your business, at what ever you can justify as a fair price. Doing so ensures GST/VAT as well as income tax is accurate. An invoice, journal entry or receipt balanced by a line item to an equity account could be used to record this.
If you don’t like the tax consequences your business could write it off as lost / damaged stock.
For tax purposes, we are a pass through entity, so all of the P&L is reported on my personal tax return. We do not have corporate taxes here. Sales tax was paid to the supplier, and me being the end user would pay no sales tax or use tax on the items anyway.
It looks like I will have to create myself as a customer, then raise an invoice with no sales tax on the items and sell them at cost, then use a journal entry to waive the price of the invoice and move it to the owner draw account.
It seems this would be much easier to just have the ability to write inventory items off directly to owners draw.
It can be much simpler.
If you are in a sales and use tax regime and paid sales tax upon purchase of the inventory, all you need to do is record a receipt from yourself with no tax code. No sales invoice, no journal entry. You can turn right around and withdraw the money as part of your next draw.
But that raises two more questions. Why are you paying sales tax on inventory purchases? That raises your cost of goods and illegally results in your customers being charged sales tax twice. And, how will you deal with reporting sales on which you did not report having charged sales tax? That will get you in trouble with your tax authority, too.
We pick and choose which items are taxed and which ones are not. In this case I purchased a laptop for a family member through my vendor. We identified it as an end user and were charged sales tax. We do the same thing for office supplies. We order from the same vendor that we order merchandise from but pay sales tax on those items because we don’t sell pencils or paper clips.
It has always been easier to let them deal with it rather than pay use tax on our side and my CPA has said this is acceptable. We have copies of each invoice showing sales tax was already paid on the items that are used in our office.
Those items should never be in your inventory in the first place, because they are not held for sale or production. A laptop may be a fixed asset. Otherwise they are simply items you purchased. If you purchased them knowing they were not destined for business use, the expenditure should just be posted as a draw from the outset. You have effectively made a withdrawal of capital in kind.