Unfortunately, a client closed their business never being able to fully recover from the financial issues caused to their business by the pandemic.
They canceled their lease and shut the doors with a small amount of inventory remaining (about $3,000).
They donated the remaining inventory to an organization. There was some confusion and they were unable to get a tax receipt (I’m guessing they donated to an organization that was not a registered charity - I will confirm this later).
What would be the bookkeeping/accounting/tax treatment for this?
I know the inventory will be credited but what will be the debit side of the journal entry? Shareholder loan?
(Business has a shareholder loan account balance in credit position which it will not be fully able to repay to the shareholder upon closing)
DEBIT Shareholder loan $3,000.00
CREDIT Inventory $3,000.00
Had 2 clients in the same situation…I closed out inventory to purchase expense…in both cases they had insane amount of losses anyways.
Both corporations folded, no benefit to anyone for the loss; certainly the shareholder had no benefit. Sad days.
An ABIL on the shareholder’s loan, possibly.
Could be done many ways. I would consider, “What is the MAIN purpose of the transaction?” and post accordingly:
Was it primarily to be philanthropic? Record it as donation expense
Was it primarily to sell inventory? Record it in cost of goods sold
Was it primarily to dispose of unsaleable inventory? Write it off to Inventory shrinkage or Inventory adjustment or Inventory loss (probably grouped under cost of goods sold)
Was it primarily for the shareholder to gain some kind of benefit? Post it to shareholder loan
If the inventory was donated to a registered charity, ensure any receipt properly reflects the business as the donor (not the shareholder personally). See:
If you will not be getting a donation receipt i would just close the inventory account to COS end of story same as throwing it in the dumpster.
If you get a donation receipt in the corp name, credit inventory and debit donation expense.
If you will get a donation receipt in the personal shareholder’s name, CR sales (ie sell to shareholder) CR inventory DR COS and DR SHL. ALSO create an invoice to the shareholder and pay applicable taxes.
As an aside, imo always better to make donations personally, increase your remuneration from the company if necessary and them make your donation.
I agree with @Nezzer without a receipt and @jimt if they do get a donation receipt.