Why inventory can’t be written off to special accounts??
Thanks a a lot
The short answer is that special accounts are balance sheet accounts. And inventory must be written off to an expense account.
Maybe a longer answer appreciated. The Guides @ https://www.manager.io/guides/10709 state
“
Allocationis where you select the account to be debited. Only expense accounts and certain balance sheet accounts can be chosen.”
A forum search on this did not tell which BS accounts could be chosen.
But sir, I expect we could need to write off the inventory to my own account, for example. Or to someone’s account (for the purpose of giving him something from my inventory at the cost price)
Transferring of inventory is not a write-off.
I don’t mean to transfer the stock at all.
Assuming you have a special account for you (It may be a liability account for you to the company and you will pay it after a while)
Then you’re going to take something of the inventory at the cost price to this special account.
Isn’t that a write-off?
No it is not. A definition by Inventory Write-Off: Definition as Journal Entry and Example states:
What Is an Inventory Write-Off?
An inventory write-off is an accounting term for the formal recognition of a portion of a company’s inventory that no longer has value. An inventory write-off may be recorded in one of two ways. It may be expensed directly to the cost of goods sold (COGS) account, or it may offset the inventory asset account in a contra asset account, commonly referred to as the allowance for obsolete inventory or inventory reserve.
In relation to:
Whenever someone else gets your inventory it does no longer belong into your inventory and is thus transferred to that person or business. In your statement you would indicate “giving” at “cost price” this is still “selling” at cost price. So you would sell it to that person. Same if you start owning some of this inventory at cost-price it is being sold to you and will be removed from the inventory.
So you need to Invoice the buyers for the items of your inventory at cost price. This will ensure the items are removed from inventory and recorded as revenue to balance the books.
There’s a problem with this: if you sell at the cost price, it’ll be recorded in the manager’s sales account and the cost of sales.
But this will give the impression that you have a higher sales value than I actually do (because part of the inventory was not sold but used personally or given to someone without profit)
example
If your sales value is $20,000
This sales cost $15000.
You have a $5, 000 profit(25% of sales)
And then I took items from the inventory at a cost of $10, 000, and I created a bill for them at the cost price.
The accounts will become
sales value is 30000$
This sales cost $25000$
You have a $5, 000 profit(17% of sales)
The result is that you only earn 17% of sales, but the truth is, it’s the inventory you took at the cost price that caused it.
Isn’t that right?
- Do you agree that in principle the inventory items could have been sold?
- Do you agree that you purchased such inventory and thus have a cost price attached to it?
If yes to both then you indeed lost profit but that is just the difference between sales and cost price. If you sold it at cost price you would not generate profit as you bought it at one time and then sold it at another time at the same price. When you give it away the value of your inventory will reduce with the Qty of items in inventory * their cost price. In essence your expenses would be higher then the sales value and on those items the business runs a loss.
In addition, your sales value is not the true value but an estimate of what you could sell an item for. If you sold some items at lower prices then that will result in lower profit or even loss (when sold below cost price) because the cost price is what actually was paid for the item so the difference changes. A lot of business go bankrupt by owners consuming their inventory (think restaurants) without paying the full sales price, or at cost price or as give away, without facturing in that this dramatically affects business profit.
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Furthermore you could distinguish between the owner who pays from reduction in equity while reducing inventory (simple journal entry with debiting Equity Drawings account and crediting Inventory account) so that it is not shown as a business expense account but just reducing the equity (Capital account owner) while reducing the assets (inventory). For the “other” person outside the business this should be regarded as a sales to that person at whatever sales price you determine.
thank you very much @eko You’ve done well.
However, this does not Prevents the possibility of writing off inventory to special accounts from my point of view.
I am very sorry and I wish you and your business all the best and hope that it will stay afloat and not get entangled with very difficult questions by your tax authorities about how this is accounted for.
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