Giving away inventory for promotion
Do you sometimes give away some of your inventory for promotional purposes? Or do you sometimes have to return inventory to a vendor? If so, how to you handle the accounting for that?
To date, Seller Ledger has treated manually removed inventory as shrinkage. But no longer. Today, we add support for additional reasons.
Let’s take the example of giving away inventory items for promotional purposes. When you go into your Inventory ->In Stock view, click the “Remove stock” button:
You will then be presented with an updated form. Click on the new “Type” field to choose a reason for this inventory removal. Notice that “Shrinkage” is still an option, but you also now have the flexibility to choose a different expense option.
When you choose “Custom Expense”, in addition to asking for the specific product that you are removing from inventory, we also ask for an expense category. In this case, because we’re using the inventory item as a promotional giveaway, we’ve chosen “Advertising” as the category.
What’s happening behind the scenes?
Normally, when you sell an item, or if it breaks (e.g. “shrinkage,) when you reduce your inventory account by the cost of that item, you also add that amount to “Cost of Goods Sold.” However, when you give away an item in your inventory for marketing/promotional purposes, you are still reducing the amount in your inventory, but now you are choosing an operating expense like “Advertising” or another similar category of your choosing.
The reason this might matter to you is the impact it has on gross profit and gross margin calculations. If you were to include giveaway items in your gross profit calculations, you might draw the conclusion that your are earning less on each individual sale than you actually are.