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Mandeville LA 70470-8678
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E-mail dutch@brrinc.org

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How to Deal with Stolen, Destroyed, or Obsolete Merchandise

Sometimes inventory is removed from the store for reasons other than the usual reason of clients purchasing it. The owner may find that a thief removed half of his cigarettes inventory during the night. Or he might find that broken water pipe in the storage room ruined a large amount of cigarettes inventory. There is another interesting possibility that a client called me about. Quite a few cartons of cigarettes passed the expiration date. The suppliers would not take them back, so the owner had no choice but to toss them out and experience a substantial loss.

How will this affect the COGS computation? Sometimes we tell clients not to worry about small amounts of theft. Here's what we explain. The comparison below shows that there is hardly a difference of 25% and 24.875%. We would round both off to the same 25%.

Without $50.00 theft
Sales$40,000
Beginning inventory$15,000
Purchases$29,000
Ending inventory$14,000
COGS$30,000
Gross profit$10,000
Gross profit Percentage25%
With the $50.00 theft
Sales$40,000
Beginning inventory$15,000
Purchases$29,000
Ending inventory$13,950
COGS$30,050
Gross profit$9,950
Gross profit Percentage24.875%

Now let's do the same comparison with an $8,000 theft.

Without $8,000.00 theft
Sales$40,000
Beginning inventory$15,000
Purchases$29,000
Ending inventory$14,000
COGS$30,000
Gross profit$10,000
Gross profit Percentage25%
With the $8,0000.00 theft
Sales$40,000
Beginning inventory$15,000
Purchases$29,000
Ending inventory$6,000
COGS$38,000
Gross profit$2,000
Gross profit Percentage5%

The problem is the 5% Gross Profit Percentage. It is so low because $8,000 was sold for $0.00. In this case, we do want to show the amount of merchandise that did not participate in the store sales.
This is how we do it:
  1. Make the out-with-the-old-in-with-the-new-inventory COGS calculation as usual.
  2. Figure the amount of merchandise stolen, destroyed, or obsolete at cost, not at retail.
  3. Make a general journal entry:
    1. Debit Stolen merchandise, Destroyed merchandise, or Obsolete merchandise, preferably an "other expense" account.
    2. Credit COGS.
  4. This will remove the unsold and unsellable merchandise from the COGS calculation, put it where it will be properly deducted as an expense, and will allow the COGS calculation to work on the rest of the merchandise that was bought and sold.

This is what the COGS calculation will look like now:

Sales$40,000
Beginning inventory$15,000
Purchases$29,000
Ending inventory$6,000
COGS$38,000
Charged to Stolen merchandise$8,000
Adjusted COGS$30,000
Gross profit$10,000
Gross profit Percentage25%

This will tell the merchant, "Well, you did have $8,000 of merchandise stolen. But of the rest that was not stolen, you at least got your 25% gross profit percentage. At least you know that you do not have another problem of a low gross profit percentage in addition to the theft." Or destroyed, or obsolete merchandise.

Copyright - 2008 Dutch Hawkins Mandeville, LA USA - All Rights Reserved

April 24, 2008