If you have an accountant, check with her/him on this matter.
I have asked a few accountants myself and will share with you what I
have found out.
Essentially, your scrap is as much a part of your inventory as brand
new sheet, wire, casting grain, etc. As such, when you take inventory
(whether you do it monthly, quarterly, or annually), include it in
your inventory. Of course, metal dust (which some people send to
refiners) cannot really be measured due to the high quantity of
impurities such as abrasive dust, etc. Basically, do your best to
make take a reasonable assessment of your inventory.
When you send metal to the refiners, there is naturally a loss of
metal. There are a few possible methods to account for this. The IRS
allows for slight variations in accounting methods provided they are
reasonable, consistent, and honest in the tracking of changes. My
suggestion for accounting for loss of method is to go into your Item
List (assuming you are using QuickBooks), click on the "Activity"
button. On the pop-up menu, click on “Adjust Quantity/Value on Hand”.
This brings up the “Adust Quantity/Value on Hand” window. Go to the
appropriate item (gold/silver/whatever) and indicate the loss in
quantity. In the adjustment account field, put “Inventory Asset”. In
the memo field, put “loss due to refining” or something similarly
appropriate. That way, if anyone inquires about the adjustment, you
can explain it. Now when you make this adjustment is up to you. You
may do it right after receiving your refined metal or just make the
adjustment following your next inventory assessment. The important
thing is to be consistent.
Like you, I track both raw materials and finished jewelry. When I
make a piece of jewelry, such as a diamond ring, I account for this
in QuickBooks using the same method listed above. I go into the
"Adjust Quantity/Value on Hand" screen, indicate the changes in gold,
diamonds and rings in inventory (e.g. -3g in gold, -1 diamond, + 1
ring), and attribute any difference in value to “Inventory Asset”. In
the memo field, I put “value difference due to creation of ring” or
whatever. My accountant is cool with it because it is reasonable,
consistent and honestly reflects what is occuring. These adjustments,
as with the adjustments for metal loss, are reflected in your Balance
Sheet and your Cash Flow reports, but not your Profit/Loss statement.
The reason is that only the Balance Sheet and Cash Flow reflect
changes in the value of your inventory. Profit & Loss reports only
show income and expenses. The fees that the refiner charges you for
their services would be an expense, but the loss of metal is a change
If you, like most of us, are struggling to understand Accounting, I
would strongly suggest reading the book “The Accounting Game”. It
explains accounting principals and concepts in the context of running
a lemonade stand. It is fun to read and very informative. It even
addresses issues of loss of inventory, bad debt, etc. Unlike most
books on accounting, it is NOT DRY or BORING!!!
Let me know if I can help with any other questions. But check with
your accountant, as well.
Warmest Wishes, JoAnna Kelleher Director of Operations/Designer
Pearl Exotics Trading Company
4397 W. Bethany Home Rd., #1281
Glendale, AZ 85301
Phone: (623) 845-0998
Fax: (623) 845-0917