How do you document a loss?

[wetshavingproducts]

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.​

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.

 

[cpacamper]

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!

 

[wetshavingproducts]

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.

 

[cpacamper]

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.

 

[wetshavingproducts]

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....