My client is asking about produce spoilage and whether or not they can write off anything they have to throw out. What do you think? I’m looking to see if my interpretation of handling spoilage is correct. Thanks for any feedback!
If it relates to a business then yes. He/She is in the business of buying/selling fruit.
For personal then no.
It depends how the inventory was first recorded.
If the purchase of the inventory was recorded to an “Inventory” [an asset account], you can reduce inventory, which results in a debit to “spoilage”.
If the purchase of the inventory was recorded to “purchases” [an expense account] one cannot deduct spoilage because the amount was already claimed.
To clarify, some produce is grown from seed, some purchased already grown.
Whether they’re growers or sellers, the costs are all ready in their expenses. There’s nothing additional to write off.
I lost a client once because they couldn’t get the concept that when they donated stuff from their stock to the Food Bank, that they couldn’t get an additional write-off because the cost which had already been expensed. I think they thought either I didn’t know what I was doing or that I wasn’t on their side.
Barb, there are two situations.
- Wholesaler or retailer
- Grower, creator, etc
Wholealer or Retailer
The wholesaler or retailer purchased the finished produce. For the wholesaler or retailer, the produce is an inventory item. The cost of goods is generally based on the landed invoiced price. Exchange rate, duty, shipping may be included.
How spoilage is handled depends upon the “inventory” system used.
- If inventory is added to assets and expensed at the time of sale, then spoilage is an period end adjustment to realize the cost.
- If “inventory” is expensed at the time of purchase and the asset is valued at the time of the physical count (at period start and end), then the cost has already been applied.
For the grower the cost of goods is based on the input expense. The produce is valued at the time of sale to the income account. The input expenses are valued at the time of purchase or payment depending upon the specifics of your situation. Finished produce that is spoiled is never added to income. There is nothing to adjust.
This is sometimes are hard and frustrating accounting concept.
- For example, if an owner or operator does not pay themselves any salary, just dividends, then anything that they create is assumed to zero cost.
- For example, if a grower produces perishable goods these are valued at the time of sale. The only time “spoilage” is written off, is if the client is shipped spoilt or damages produce for which they receive a credit. In that case the credit reduces revenue. This is handled differently in the case of a manufacturer who creates finished goods inventory and then adds them to an asset account for sale.
- An mechanic who repairs his own company truck can expense the parts but not their time unless they are on payroll. In that case the payroll amount is expensed.
Also been on the end of the client who felt they were correct and ended up leaving ( operating vs. capital lease, donation of stock, no mileage log, employee vs subcontractor, paying someone cash and insist to put it thru office expense – not as a subcontractor, etc… Adhering to the rules is more important than keeping a client.
Hoping your client is just wondering and won’t hold it against you that there is nothing additional to do.
Thank you for the info…this is exactly what I thought.
Thanks Rachel! I agree!