USA Bookkeeping for sale of non-assets

[sparksh]

I do electronic and software design for clients and don't normally sell physical products. I do keep an inventory of electronic supplies for building prototypes and doing repairs. A client recently had a problem and I sold them $2000 worth of these supplies. The items were expensed long ago in previous accounting periods. They were never treated as capital assets for depreciation and have no existence in my current ledger.

If I send an invoice with a list of items and their replacement cost, my accounting software would end up posting a revenue, which doesn't seem to be correct. What are the appropriate bookkeeping entries for this transaction? (Cash basis accounting.)

Thanks!

 

[DrStrangeLove]

Booking revenue on the sale is correct. Your accounting software is trying to book a revenue because the sale of supplies brings in cash from "outside" your business.

You described the supplies as "expensed" long ago. From how you describe it, the supplies weren't expensed. The purchase was paid for, which is a different thing. (Buying the supplies in the first place looked like Supplies xxx DR/Cash xxx CR or something similar.)

For sale of supplies: Supplies Expense xxx DR/Supplies xxx CR
For the payment the customer made for the supplies, when it comes in: Cash yyy DR/Revenue yyy CR.

If the supplies "have no existence in [your] current ledger", then how are you accounting for them when you purchase them?

 

[sparksh]

Thanks for the quick reply.
By "expensed" I mean there was a Debit "Expenses/Electronics", Credit "Liabilities/Visa xyz/Charges" in a previous year for each item.

By "no existance in my current ledger" I mean that their is no record of the purchase in this year's ledger. The original expense vanished at the end of the year when it was posted and revenues-expenses became equity. The purchases were spread out over many years, sometimes in mixed groups and it wouldn't be easy or sometimes even possible to find the cost each item.

Imagine that you expensed a case of printer paper last year which you used to print ephemeral reports. It's now wastepaper and the expense has been subtracted from your equity for that year. In the new year, someone shows up and offers to buy your dumpster full of recyclable paper for $10. Is that pure revenue? You're selling the paper for less than you paid for it. I'm sure I'm confused.

 

[DrStrangeLove]

I see what you did there. You expensed stuff you should have capitalized. The debits you made to Expenses/Electronics should have been to an asset named something like "Supplies - Electronics". Your "electronics expense" would be incurred when you use them for a repair, or included in the value of a prototype when you build one along with other indirect costs. You liken your supplies to scrap paper. But they're not scrap; you bought them and keep them so that you can use them. They're indirect materials--materials you use in making something, but you don't track separately the cost of every little item used.

As for revenue: the revenue entry accounts for the cash (or whatever) you got. The two-part entry lets you charge a different amount than the supplies cost you. With an asset that represents what you're selling, the amount you're paid for the supplies is indeed "pure revenue". It's cash coming in that you didn't have before. If you're selling the supplies for cost, you could do it with one entry: Cash xxx DR/Supplies - Electronics xxx CR....if you had a Supplies - Electronics asset account on your books.

In order to set things right--everyone out there, please check my thinking on this--you'd correct your books by making an entry:

DR Supplies - Electronics (to balance)
CR Retained Earnings (stuff you purchased in prior years)
CR Expenses/Electronics (stuff you bought in the current year)

In essence, you need to remove a reasonable portion of the previous expenses into an asset. Prior years' expenses are in Retained Earnings, and this year's expenses are in the Expenses/Electronics account. Future purchases will debit Supplies - Electronics.

Look around for what you have. Eyeball about how much it cost you to buy it, and maybe aim a little low. Split that amount between what you bought this year and what you had from prior years, and I think you're good to go. That should get you right, I think.

 

[sparksh]

Transforming them into supplies will do the trick. Or at least Pacioli is satisfied. I couldn't figure out how to do that.
Thanks!

 

[sparksh]

Have I got this right? (All amounts the same)

Debit	Credit
Assets/Supplies	Equity/Retained Earnings
Expenses/Electronics	Assets/Supplies
Assets/Cash	Revenues/MrCustomer

Is anything missing that would impact taxation? It seems that I've posted this expense twice: Once long ago and again on line 2.

 

[DrStrangeLove]

The amounts shouldn't all be the same. The correcting entry is putting the value of the all the supplies you have on hand into the Assets/Supplies account, not just the supplies you're selling to Mr. Customer. Once you move that value into the Assets/Supplies account, then you reflect the sale of the supplies to Mr. Customer.

First make Entry 1:

• DR Assets/Supplies $a.aa + $b.bb
• CR Equity Retained/Earnings $a.aa
• CR Expenses/Electronics $b.bb

This will reclass the value of all your supplies on hand from prior earnings and current expenses into Assets/Supplies and reflect how much they're worth. It's not reclassing just the ones you're selling to Mr. Customer.

If you're selling the electronics supplies for cost to Mr. Customer, then make Entry 2a:

• DR Assets/Cash $x.xx
• CR Assets/Supplies $x.xx

This entry has no effect on income, because you're trading one asset for an equal amount of a different asset.

However, if you're selling the supplies for more than cost, then instead make Entry 2b:

• DR Expenses/Supplies $x.xx
• CR Assets/Supplies $x.xx
• 
  
• DR Assets/Cash $y.yy
• CR Revenue/Sales to Mr. Customer $y.yy

As for the tax implications, it really depends on how much you're reclassing from retained earnings into the Assets/Supplies account. Does this materially change the tax you would have owed? If your business is a sole proprietorship or other passthrough entity, does this change the tax bracket you'd be in on your own 1040?

If you're reclassing only from the current year's Expenses/Electronics account, then there may be some catch-up effect on your quarterly estimated taxes. But it'll be a timing difference that will wash out by the end of the tax year.

 

[GPTTroll]

In cash basis accounting, the appropriate bookkeeping entries for this transaction would be as follows:

1. Record the sale of the electronic supplies: Debit Accounts Receivable (or Cash) $2000 Credit Sales Revenue $2000

2. Remove the cost of the supplies from your inventory: Debit Cost of Goods Sold $2000 Credit Inventory $2000

These entries reflect the recognition of revenue from the sale of the supplies and the corresponding reduction in inventory. Since the supplies were expensed in previous accounting periods, there is no need to account for depreciation or capital assets in this transaction.

[disclaimer]
This is an experimental response generated from GPT-4 in conjunction with the text from FASAB GAAP Handbook. I am trying to understand how well this approach works. I am not an accountant. FASAB Handbook top pages: 56, 733, 240, 599

 

[DrStrangeLove]

In cash basis accounting, the appropriate bookkeeping entries for this transaction would be as follows:

1. Record the sale of the electronic supplies: Debit Accounts Receivable (or Cash) $2000 Credit Sales Revenue $2000

2. Remove the cost of the supplies from your inventory: Debit Cost of Goods Sold $2000 Credit Inventory $2000

These entries reflect the recognition of revenue from the sale of the supplies and the corresponding reduction in inventory. Since the supplies were expensed in previous accounting periods, there is no need to account for depreciation or capital assets in this transaction.

[disclaimer]
This is an experimental response generated from GPT-4 in conjunction with the text from FASAB GAAP Handbook. I am trying to understand how well this approach works. I am not an accountant. FASAB Handbook top pages: 56, 733, 240, 599

You cite "FASAB Handbook" as your source. FASAB sets GAAP accounting standards for US federal government entities. The OP is not representing a US federal government entity. So your source is entirely off-point. Nor does your answer actually address the real underlying problem--the mischaracterization of the purchase of electronics supplies as an expense rather than as an asset.

So, yeah. Well done. Please stop spamming with GPT-4 gibberish.

 

[GPTTroll]

@DrStrangeLove thanks for taking the time to answer. In the previous post I had restricted GPT-4 to FASAB/GAAP - because Accounting at my organization is primarily interested in consulting/citing GAAP. I suspect many other large companies are doing so, as well.

I posted the query by @sparksh to unconstrained GPT-4 which generated the following answer:

"Based on your situation, you should record the sale of the electronic supplies as revenue. Even though the items were expensed in previous accounting periods, you are now generating income from their sale. Here's how you can record this transaction using cash basis accounting:

1. Debit Cash (or Accounts Receivable if not yet paid) for $2,000: This entry increases your cash or accounts receivable balance, reflecting the money you received or expect to receive from the client.

2. Credit Sales Revenue for $2,000: This entry increases your sales revenue, reflecting the income generated from the sale of the electronic supplies.

The appropriate bookkeeping entries for this transaction would be:

- Debit: Cash (or Accounts Receivable) $2,000
- Credit: Sales Revenue $2,000

It's important to note that under cash basis accounting, you record transactions when cash is received or paid. Since you are selling the electronic supplies, it's appropriate to record the transaction as revenue when you receive the payment.

In the future, if you continue to sell electronic supplies, you may want to consider setting up an inventory account to track the cost of goods sold and better manage your inventory. This would involve adjusting your accounting method to account for inventory, which may require consulting with an accountant or tax professional.

Sources:
- IRS Publication 334: Tax Guide for Small Business (https://www.irs.gov/pub/irs-pdf/p334.pdf)
- IRS Publication 538: Accounting Periods and Methods (https://www.irs.gov/pub/irs-pdf/p538.pdf)"

GPT-4 suggests that under cash basis accounting, recognizing revenue is still a viable option even though your answer is probably more correct (also verified by GPT-4). However, it further suggests that an inventory account be set up for the future, if this is the norm.

I don't believe these technologies will replace true experts but certainly can be effective partners. As a computer scientist, it's a cause for celebration that machines can even reach this point. At the very least, this new emerging reality cannot be summarily dismissed.

 

[Jessymathew]

Bookkeeping for the sale of non-assets typically involves recording the financial transactions related to the sale of goods or services. Here's a step-by-step guide on how to handle bookkeeping for such transactions:

1. Invoice Creation: If you are selling goods or services on credit, create an invoice for your customer. The invoice should include details such as the date of sale, a description of the goods or services, quantity, unit price, and the total amount due.
2. Recording Sales Revenue: When the sale is made, record the revenue in your accounting books. If you're using double-entry accounting, you'll make two entries:
   • Debit Accounts Receivable (or Cash): Increase the Accounts Receivable (if the customer hasn't paid yet) or Cash (if it's a cash sale).
   • Credit Sales Revenue: Increase the Sales Revenue account.
3. Payment Collection (if applicable): If the customer pays immediately, record the payment as follows:
   • Debit Cash: Increase the Cash account.
   • Credit Accounts Receivable: Decrease the Accounts Receivable account.
4. Sales Tax Handling (if applicable): If your sales involve sales tax, create a separate account for tracking sales tax collected. When collecting sales tax, record it separately:
   • Debit Cash (for the tax amount collected): Increase the Cash account.
   • Credit Sales Tax Payable (or a similar account): Increase the Sales Tax Payable account.
5. Cost of Goods Sold (COGS) or Expenses (if applicable): If you're selling products, record the cost of goods sold associated with those products. This involves reducing your inventory and increasing your expenses.
   • Debit Cost of Goods Sold (or an expense account): Increase the COGS or Expense account.
   • Credit Inventory (if applicable): Decrease the Inventory account.
6. Regular Reconciliation: Regularly reconcile your accounts, such as Accounts Receivable, Cash, and Sales Revenue, to ensure that they match your financial records and bank statements.
7. Financial Reporting: Include the sales revenue and related expenses in your financial statements, such as the income statement, to analyze your company's financial performance.
8. Maintain Records: Keep all invoices, receipts, and transaction records organized and readily accessible for auditing and tax purposes.
9. Tax Reporting: Depending on your jurisdiction and the nature of your business, you may need to report sales and pay taxes. Ensure that you comply with all tax regulations and deadlines.