We are cutting cords of wood and then bagging or boxing them for resale.
I have the labor to cut the wood, the bags and boxes, and other expenses to
cut the wood such as employee reimbursed mileage, equipment etc.
At the end of the period I have so many cords of wood.
Do I do a contra expense account and an asset account for the wood in
Cost of Production of Inventory 25,000
Inventory - Wood 25,000
My boss is suggesting something different but I want to get this straight.
He is saying we have so many cords and wholesale value is $xxx so that
becomes the basis of his inventory, but it doesn't sound right.
I assume once it is sold, I credit inventory, debit cost of goods sold, and
debit cash & credit sales & tax, etc.
Thanks for looking at this.
There are two considerations:
a. How material is it? If a significant amount of money is being locked up
in inventory then yes, account for it.
the IRS wants you to back out this labor cost from expenses and load it into
Assuming the costs are significant, you only need to make a good faith
estimate and rectify the accounts - which you can do with a simple reversing
journal entry. That bring us to
b. What level of detail do the business owners want to see fromth system?
Some businesses want to ensure that they have their inventory costs to be
precise; others use a rule of thumb for the overheads/incidentals and do not
I've seen a few owners who know their cost of goods down to withing 2% of
actuals - all the information is in their heads and they can figure their
costs out on a napkin. Many owners and managers do not have that gut
feeling and WOULD use the information if it were collected and made
available. Yet others are so deluded that your efforts may be wasted or
In other words, Know thy boss...