Finished, Unsaleable Goods - How to Account in Inventory

[Don]

I have a successful craft business. Not sure how to value finished, unsold goods that I have been carrying for a couple of years. They are unsellable
now because I have switched to online sales only and the products only sell well in person-to-person venues.
q. 1 - Is the value of these goods the cost for materials that went into the goods? Or should I also include an estimate of my personal labour involved?
q. 2 - Does this become "dead stock" that I apply as an inventory expense this year, or should I have applied it the year of production.
(In the year of production there were sellable goods that I had at the end of the year.)

[turboguy]

You can do it pretty much any way you want. If you want to maintain them in your inventory then the cost you should value them for in your inventory is the material and labor cost. If you had employees that did the work then it would be better to only show in your inventory the value of the materials. You also have the option of just writing them off and showing no value which will reduce your taxes. You could also show them at what the salvage value would be in your opinion even if that is 10 cents on the dollar. If you do write them off and later sell them you just show that as income and don't show a change in the inventory.

No, they don't become dead stock that you can apply as an inventory expense. You should have already expensed them when you bought the material. You can't expense them twice.

[Don]

Thank you.I am not too bright at this stuff and if you could explain how to "write them off" I'd be grateful.
Given these goods were included in my inventory from last year, where do I account for them this year.
For instance if my end-of year inventory last year was $10,000 and I want to write them off this year, what to do?
Or, if I decide to determine salvage value to be $500, how does this fit into my inventory value for this year?
Thank you.

[turboguy]

I can try Don. I am assuming you do a year end inventory. If you are going to write them off you just don't count them as part of your inventory. Let's say for example you have $ 10,000.00 in good inventory and those cost you $ 2000.00 to make but you don't think you can sell them at any price so then you just record your inventory as 10 grand and ignore them. If you think you can dump them on eBay or someplace and might get $ 500.00 for them then your inventory would be $ 10,000 + $ 500.00 = $ 10,500.00.

It is officially called valuing your inventory as the lessor of cost or market value. So for example if your cost was two grand but you only expect to be able to sell them for $ 500 you can chose which is best to value them, cost or market value. In this case we are using market value which could be zero or could be $ 500.00

[Don]

Let me see if I understand... say my inventory at the end of 2014 was 10,000. This included the finished goods that I cannot sell now, which were valued at 2,000 (material and labor) and included in my inventory figure for last year I think I can sell them at salvage for $500 but may or may not get around to doing so this year. Providing I did not add anything to my inventory this year, is my inventory for this year 10,000 + 500. I think I have gotten lost somewhere. Beginning to feel like an idiot.

[turboguy]

That was my fault Don. Looking back on my last post I was not as clear as I should have been and I am sorry that I confused you more. The reality is that it isn't that big an issue.

Clarifying my previous post I should have said that the $ 10,000 did not include the unsalable goods and if you valued them at $ 500 your inventory would be 10,500. But let me try this again.

However you value your inventory will only have a short term effect on your profits as you report them. Over a period of years it will all come out the same.

Let's say that you value them this year at $ 2000.00 even though they have no value. You would figure your cost of the goods you sold in the following manner.

Starting Inventory plus purchases minus ending inventory would give you the cost of goods sold.

If you value your unsalable inventory at your real cost which in our example we are saying is $ 2000 then your ending inventory would be $ 2000 higher than if you valued them at zero. This would make your income for this year higher by $ 2000 using the above formula.

If you value your unsalable inventory at zero and you are never able to sell them then your income would be $ 2000 less this year but accurate. If you later were able to sell that inventory for $ 500 then your income would be higher that year by $ 500.00

I probably have you more confused than ever. The bottom line is that over time it will all come out the same. Regardless of if you scrap them, or sell them for less than you would like to or even if you sell them for a big profit, over the course of time it will end up the same. You would be just shift the income or loss from one year to the next or the following.

Maybe it is better not to try to understand it and if you think you can sell them at a big discount then just value them for what you think they are worth. If you think you can not sell them at all then value them at zero. If you value them at zero and later you are able to sell them for lets say $ 500.00 that will just show as a $ 500.00 increase in your income for that year.

[Freelancier]

Maybe this will help: Why Does Inventory Get Reported on Some Income Statements? | AccountingCoach (http://www.accountingcoach.com/blog/inventory-reported)

Basically, inventory is a current asset. It's only the change in inventory that affects your income statement (usually through the sale of the inventory). You already account for the creation of the inventory with the other costs you track (raw materials, labor). If you give it away, there's no income, just a reduction in the current asset. If you sell it, there's revenue to be recognized and a reduction in the current asset.

Whatever you do, make sure your accountant can defend it if it creates a problem with taxing authorities (some want to tax your inventory).