Sch C - Accounting for spoilage

[ILLMAS]

TP has a contract to buy and delivery pastries to different supermarkets, when pastries get stael he gives them credit, but my question is how do I account for it on Sch C? Add it to COGS or use line 39 "other costs" and report as spoilage?

Thanks

[mrichman333]

If he account on the cash basis, then you shouldn't have to do anything.

Cash basis:

I pay 20 for materilial,I record 20 in expenses. I sell $40 worth of donuts, I record $40 income when I receive it.

If I discount the donuts for $30 I record the 30 when I receive it.

NO adjustment needs to be made. This example = Profit of 10 (30-20)

Accrual

I pay 20 for material I record 20 expense, I get an order for 40 worth of donuts I record 40 in income even though I haven’t received payment yet. . My books at this point show profit of 20 (40-30) Then instead of collecting the 40 I only collect 30 because the donuts are stale, I make an entry on my books returns and allowances for 10. Now my books show

$40 income

- 10 allowance or discounts...

30 Income

- 20 material

10 profit same as above.

So unless the discount of 10 was actually included in gross receipts you do nothing. ONLY if you included the full price in gross receipts do you need to make an adjustment.

[taxxcpa]

Spoilage should automatically be taken care of by the reduction in ending inventory. For example if you had 500 items and 200 spoiled:

With no spoilage: With Spoilage

Beginning Inventory 1000 1000

Purchases 1000 1000

Minus Ending Inv -500 -300
Cost of Sales 1500 1700

In this case, however, he probably does not maintain an inventory.

If he gives customers a discount, then he could either record the net amount or, if he records the gross amount, show discounts as an expense.

[Guest Taxed]

taxxcpa is correct that is the way to account for spoilage and material taken out for personal use. To often small business owners don't want to deal with inventory accounting so they makeup figures for COGS. This year I turned away a new referral who was too lazy to count his wares and wanted to ballpark a percentage based on previous years. I told him that return will not have my PTIN!

[Gail in Virginia]

taxxcpa is correct that is the way to account for spoilage and material taken out for personal use. To often small business owners don't want to deal with inventory accounting so they makeup figures for COGS. This year I turned away a new referral who was too lazy to count his wares and wanted to ballpark a percentage based on previous years. I told him that return will not have my PTIN!

This also accounts for charitable contributions of merchandise. One of the hardest things to explain to clients who want to deduct at retail when they donate merchandise!

[jainen]

>>when pastries get stale he gives them credit<<

I'm not an accountant and I don't remember the right way. But I'm pretty sure the answers so far are wrong. I am absolutely sure COGS can not include inventory withdrawn for personal use or charitable contributions. That adjustment must be made on Line 36 of Schedule C. (Rules are very different for corporations.)

In the original post the merchandise has already been removed from inventory and billed to the customer, maybe even paid for. I think the refund or credit goes to Line 2 of Schedule C. It might be different if this inventory-based business uses the accrual method. Ask a real accountant.

[taxxcpa]

This also accounts for charitable contributions of merchandise. One of the hardest things to explain to clients who want to deduct at retail when they donate merchandise!

What they really want to do is to drop it from inventory, reducing Cost of Sales, then also deduct it on Schedule A as a donation.

Make that donation do double-duty.

[mrichman333]

My point is before you start deducting a price discount from any place you need to know if the price was ever included in gross receipts. My guess is he uses the cash basis, so if he normally sells the donuts for 40 but because they are stale he sells them for 30. You need to know what he included in gross receipts 40 or 30; if 30 the there is no adjustment needed.

Also weather you take it out in the COGS section or on line 2 you come up with the same net income and the same tax; and that is what is most important, that he pays the correct tax.

It’s like my customers the have rental properties. They are cash basis. I ask how much rent did your receive this year? They tell me 50,000. The they tell me one house wasn’t rented for 2 months and the get 1,500 per month. They think they can deduct the 3,000 they didn’t get in rent. I ask, did you include the 3,000 in the 50,000? They say no, I say then there is no reason to deduct it.

6. How To Figure Cost of Goods Sold

Table of Contents

• Introduction
• Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42
  • Line 35 Inventory at Beginning of Year
  • Line 36 Purchases Less Cost of Items Withdrawn for Personal Use
  • Line 37 Cost of Labor
  • Line 38 Materials and Supplies
  • Line 39 Other Costs
  • Line 40 Add Lines 35 through 39
  • Line 41 Inventory at End of Year
  • Line 42 Cost of Goods Sold

Cash discounts. Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. There are two methods of accounting for cash discounts. You can either credit them to a separate discount account or deduct them from total purchases for the year. Whichever method you use, you must be consistent. If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. For more information, see Change in Accounting Method in chapter 2.

　

Cash discounts. These are amounts the seller permits you to deduct from the invoice price for prompt payment. For income tax purposes, you can use either of the follow-ing two methods to account for cash discounts.

Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6).

Credit the cash discount to a discount income ac-count.

You must use the chosen method every year for all your purchase discounts.

If you use the second method, the credit balance in the account at the end of your tax year is business income. Under this method, you do not reduce the cost of goods sold by the cash discounts you received. When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise.

Purchase returns and allowances. You must deduct all returns and allowances from your total purchases during the year.