# How do you document a loss?



## SozoArtisanSoaps (Sep 26, 2014)

I have lost several bars of soap to humidity and dos.  How do I calculate that? I document income and expenses...but not sure how to document a loss. Thanks!


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## The Efficacious Gentleman (Sep 26, 2014)

Have a cost code for shrinkage/damaged stock and apply it as a cost.  Remember only to take the costs of the product, not the sale price.

* I am not an accountant


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## wetshavingproducts (Sep 26, 2014)

At the end of the year, when you put back in the COGS you haven't sold yet, the loss of ingredients is accounted for.

Not an accountant*

I suppose you could take photos and document it in your logs.


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## The Efficacious Gentleman (Sep 26, 2014)

But you'd also have to allow for the time, wouldn't you?  In 1 bar of soap your business has an asset that cost $x which was the cost per bar that you worked out in order to arrive at your retail price.  If you can't sell a bar for whatever reason, that asset is now a loss to your business.  As it only cost you $x, I think you would just record that rather than the retail price.

* I am not an accountant


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## wetshavingproducts (Sep 27, 2014)

The Efficacious Gentleman said:


> But you'd also have to allow for the time, wouldn't you?  In 1 bar of soap your business has an asset that cost $x which was the cost per bar that you worked out in order to arrive at your retail price.  If you can't sell a bar for whatever reason, that asset is now a loss to your business.  As it only cost you $x, I think you would just record that rather than the retail price.
> 
> * I am not an accountant



COGS are cost of goods sold, which in our case would be the ingredients cost. We can't deduct for our time, but if we paid an employee, that's deductible, but not as a COGS.

I don't see why you would record the loss anywhere other than a logbook and only as a note because the cost is already recorded in the COGS. What people probably aren't doing correctly is inventorying their soaping supplies at the end of the year and reducing their COGS by that amount.


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## The Efficacious Gentleman (Sep 27, 2014)

Ah, okay. I think either the US method  is different or I am just too used to a service based company where time is very important


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## wetshavingproducts (Sep 27, 2014)

The Efficacious Gentleman said:


> Ah, okay. I think either the US method  is different or I am just too used to a service based company where time is very important



You get to deduct the value of your time in Europe!!!??? :crazy:

Man, I wish we could do that.... but then again, I'm also glad we don't have a VAT.

But, yeah, we can't deduct the time we personally spent unless we're salaried and paid by a shell corp. But technically the corporation is paying the wage, and it's deducted the same as any employee; since the corporation is a separate "person".


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## snappyllama (Sep 27, 2014)

I think wetshaver has it down - except maybe the labor portion.  For your purposes, that probably won't matter.

The IRS does differentiate between labor paid to employees and labor paid to yourself - as far as COGS is concerned.  Labor wages paid to an employee is considered, but not to yourself.  I'm not sure; however, if you are a wage paid employee of your own company - how they would take that.:crazy:

Basically the calculation goes something like this:

Beginning year inventory 
+ everything bought during year
+ labor (wage paid employees only - if memory serves)
+overhead
-anything you used for yourself
- inventory at end of year
= COGS

The bottom line is, I believe, if you didn't pay someone a wage - it doesn't get included in COGS.

BUT 

I think you can take losses as a reduction of expected income or possibly even recoup money if you sold at a discount  (if it was something you expected to sell at $10 but had to offer at a discounted rate of $5 since you broke a piece of it).  That's why you'd want to keep track of those separately. A clever accountant will be able to help you with that.  

*not a clever accountant 
*not a accountant at all - this is just from memory (admittedly a little shaky) from hanging out with those wild and crazy folks in finance


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## wetshavingproducts (Sep 27, 2014)

Yeah, I've heard about taking a greater deduction (ie retail price) for things sold at discount or given to charity. I need to look into that.

Overhead is not a COG, it's a general cost of doing business. I don't think labor is calculated as a COG because it has it's own category. COGS are things like packaging and the cost of the raw materials that go into the item being sold.

Not an accountant, I just had to learn the basic rules so I could pay the goverment about half of my take home pay...... :\


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## snappyllama (Sep 27, 2014)

Sorry, I *think* I've got it down.  I'm a developer and code the Income Statements and various other Finance reports for my company.

Think of COGS as cost of finished product...  It's the "S" for "Sold" that indicates manufacturing is complete.

You get to include everything on the manufacturing side to take raw materials and transform them until they are ready for sale. 

You don't get to include costs associated with selling the product though.  So, sales & marketing do not go into the calculation, nor would shipping to customers.

It would be easiest to illustrate if you imagine Acme Soap has a workshop where Employee A makes soap.  The soap is sold in a shop by Employee B.

COGS
1. Recipe Ingredients (oils, micas, FOs, etc) - inventory
2. Workshop Costs (utilities, rent) - overhead
3. Employee A's wages - labor

Not COGs
1. Advertisements 
2. Employee B's wages
3. Shop costs

You might be thinking of COGS calculations for companies that do not manufacture (e.g. transform raw materials into items that can be sold).  In that case, there would not be overhead costs or labor costs included.  I was assuming that the soapers here transform their raw materials into soap; they don't just resell.  

I hope that makes it clear as mud.


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## wetshavingproducts (Sep 27, 2014)

In terms of accounting, I think you might be right (I have no clue, haven't done that research). But in terms of tax filing, employee costs are always deductible and not a part of COGS (It's a separate deduction code or whatnot) (I think). Unless it's wrapped up in a sub contractor's part. ie, the labor it took for Lye Co. to make our NAOH.


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## Soapsense (Sep 27, 2014)

http://www.obliviousinvestor.com/how-to-calculate-cost-of-goods-sold-cogs/

How you calculate COGS depends a lot on how you manage inventory, LIFO, FIFO, Average. I believe that Soapmaker 3 uses LIFO.


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## snappyllama (Sep 27, 2014)

Soapsense said:


> http://www.obliviousinvestor.com/how-to-calculate-cost-of-goods-sold-cogs/
> 
> How you calculate COGS depends a lot on how you manage inventory, LIFO, FIFO, Average. I believe that Soapmaker 3 uses LIFO.



That's a little odd... Wouldn't you typically move your oldest inventory first as it is perishable?  

LIFO can be used to try to reduce taxes by reducing net income... but I don't think many non-US countries allow it.  Plus I'm not sure if you would want that as it could be an audit risk. Since you are tracking in batches and actually moving inventory by FIFO, you want your accounting to reflect that.    

I took a quick look at Soapmaker 3  - they advise selling damaged goods to a loss-customer to remove those items from inventory and show on the Sales Reports.  That would work - you would want to make sure that you set the the sales receipt for zero sales tax since you didn't collect any.  Interestingly, it looks like the application is already tracking sales by actual batches; it might actually be using perpetual accounting instead of LIFO or FIFO.  That makes the calculations easier.

*so not an accountant


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## snappyllama (Sep 27, 2014)

wetshavingproducts said:


> In terms of accounting, I think you might be right (I have no clue, haven't done that research). But in terms of tax filing, employee costs are always deductible and not a part of COGS (It's a separate deduction code or whatnot) (I think). Unless it's wrapped up in a sub contractor's part. ie, the labor it took for Lye Co. to make our NAOH.



You're probably right on that - I'm not knowledgeable on the tax deductions side at all.


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## SozoArtisanSoaps (Sep 28, 2014)

Wow....I'm in for a world of hurt...I have only really been keeping track of income and expenses.


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## snappyllama (Sep 28, 2014)

SozoArtisanSoaps said:


> Wow....I'm in for a world of hurt...I have only really been keeping track of income and expenses.



You're probably fine, though you might be paying more in taxes than you have to.

Think of it like taking a standard deduction versus an itemized return.  Sure, the standard is easy and itemized is a pita but itemizing normally reduces your tax burden. 

A good accountant should ease your mind and possibly reduce your taxes while having you present your company in a way that could make it easier to get loans in the future.

If all you are taking about is minor amount of inventory, it might not be worth the trouble... though it can be reassuring to have your system in place.  Confession:  I'm a financial worrier and like to have that part of my house in order.


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## wetshavingproducts (Sep 28, 2014)

snappyllama said:


> You're probably fine, though you might be paying more in taxes than you have to.
> 
> Think of it like taking a standard deduction versus an itemized return.  Sure, the standard is easy and itemized is a pita but itemizing normally reduces your tax burden.



That is not correct at all. If you only record your income and expenses, you are paying less taxes than you're supposed to.

When I said you have to add back in the COG not sold, your tax liability goes up because your income goes up. We might have spent that income on a business related expense, but because we haven't sold it yet, it is considered profit.

Unfortunately it actually works out. Even though the COGS is a business related expense, it is an investment rather than overhead. So, what we're essentially doing is reinvesting in the company. So, that reinvestment cannot be deducted until the actual good is sold and the COGS can then be accurately tallied. Until the good is sold, it is just an investment.

By deducing the COG before it's sold, you're reducing your profits, so it needs to be added back in and taxes paid on those profits.

*****ing hate the logic of it. Makes the tax rate on my take home pay so much higher.....


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## Soapsense (Sep 28, 2014)

snappyllama said:


> That's a little odd... Wouldn't you typically move your oldest inventory first as it is perishable?
> 
> 
> I agree, but this is how they determine cost of a supply "from their knowledge base Q&A"
> ...


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## snappyllama (Sep 28, 2014)

wetshavingproducts said:


> That is not correct at all. If you only record your income and expenses, you are paying less taxes than you're supposed to.
> 
> When I said you have to add back in the COG not sold, your tax liability goes up because your income goes up. We might have spent that income on a business related expense, but because we haven't sold it yet, it is considered profit.
> 
> ...



I agree on the inventory portion - raw materials bought for the production of your goods doesn't get figured until it's sold... it's just an asset if you're using the accrual method for inventory reporting.  So I looked it up on the IRS site, because things like reporting are interesting to me (I know I'm a nerd).

IRS Publication 538 states: http://www.irs.gov/pub/irs-pdf/p538.pdf

Under the cash method, generally, you deduct expenses in the tax year in which you actually paid them​
I *think* cash method is allowable if you're under a certain limit... a few million if memory serves.  I've always worked for corporations that would fall outside the cash method.

If you have a loss and don't account for it, you are paying higher taxes than you should regardless of the inventory method used.

Here's the options the IRS gives for taking inventory losses on Publication 334: http://www.irs.gov/publications/p547/ar02.html#en_US_2013_publink1000225232

Loss of inventory.   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers.
  One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Do not claim this loss again as a casualty or theft loss. If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income.

  The other way is to deduct the loss separately. If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. Reduce the loss by the reimbursement you received. Do not include the reimbursement in gross income. If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery.​
An accountant should be able to advise on all the allowable deductions for fun things like travel, home office use, and depreciation.

Sorry if I have made any mistakes... I'm not an accountant.


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## SozoArtisanSoaps (Sep 29, 2014)

Bars lost so far is 47. Not sure if that is a big deal or not. Thanks for all the info and help guys! You rock!


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## wetshavingproducts (Sep 29, 2014)

snappyllama said:


> Here's the options the IRS gives for taking inventory losses on Publication 334: http://www.irs.gov/publications/p547/ar02.html#en_US_2013_publink1000225232
> 
> Loss of inventory.   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers.
> One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Do not claim this loss again as a casualty or theft loss. If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income.
> ...



So, unless our insurance reimburses us for the loss, then we just account for it when calculating the COGS at the end of the year.


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## cpacamper (Sep 29, 2014)

General comments from a soap hacking accountant, made without knowing anything about your business:

As has been said previously, Cost of Goods Sold is a formula:

Accurate beginning inventory of raw materials
Plus purchases of raw materials made during the year
Less accurate ending inventory 
Equals Cost of Goods Sold

Spoilage means a portion of your inventory was not sold, or was sold at a steep discount. You'll notice your gross profit margin (cost of goods sold divided by sales) is lower in years you have significant spoilage. A lower gross profit margin will mean a lower net taxable income, assuming fixed costs (rent, utilities, insurance, etc.) remain constant, and a lower tax.

As far as charitable donations made of finished product, that too is reflected in cost of goods sold following the same logic as above. If you want to show a charitable deduction line item on your income statement, you'll need to segregate and reclassify the cost of donated items from inventory. 

Consult your tax advisor, of course!


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## wetshavingproducts (Sep 29, 2014)

cpacamper said:


> As far as charitable donations made of finished product, that too is reflected in cost of goods sold following the same logic as above. If you want to show a charitable deduction line item on your income statement, you'll need to segregate and reclassify the cost of donated items from inventory.



Very sad my friend was not correct, but I was 90% sure she was wrong. She's not very knowledgeable about these things.

Hate it when I'm right sometimes.


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## cpacamper (Sep 29, 2014)

wetshavingproducts said:


> Not an accountant, I just had to learn the basic rules *so I could pay the goverment about half of my take home pay......* :\


 
 Ain't that the sad truth...

 I once had a client who insisted on showing full retail price for a charitable contribution of her product on her income statement, so I had her record a full retail sale, debiting "charitable contributions" instead of "cash".  Round about way to get to the same result.


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## wetshavingproducts (Sep 29, 2014)

Took me half a minute to draw the circle. I bet she paid for the "privilege" too, huh? Well, that explains why some people think they can deduct the full amount of the retail sale off....


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