Certain product sellers, especially those in the food service industry, deal with perishable inventory. It’s one thing to take an annual inventory of items with a shelf life of multiple years, but how do you account for inventory that can expire in just a few days, weeks or months? Several inventory methods can help you ensure your products stay fresh so you use them ahead of their expiration date.
Use an Appropriate Food Inventory Method
Normally, a commercial business should perform a manual inventory count once per year to accurately report sales, expenses, and losses. For businesses such as restaurants, food trucks, supermarkets, and grocery stores, though, a once-per-year inventory system is inadequate for determining how much inventory is lost to spoilage. If you operate a food service business, you almost certainly need to employ a more frequent inventory schedule.
If you own a grocery store that sells refrigerated or frozen foods and raw ingredients, it’s beneficial to perform a physical inventory count multiple times each year. When you operate a restaurant and stock fresh food for immediate or near-immediate consumption, you may benefit from using a single-period inventory system. This type of inventory system means performing an inventory count before ordering new stock, thus ensuring you don’t order excess inventory of an item already in stock.
Accounting for Spoilage in Perishable Inventory
Even with diligent and regular inventory checks, most businesses in the food industry occasionally lose some products to spoilage. So how can you keep it to a minimum? Keeping detailed records of any inventory you do lose can help you avoid excessive monetary loss when you file your taxes.In any case, you will need to build in a regular method of stock rotation by tracking expiration dates to account for shelf life. And your stock levels must not exceed the maximum product shelf life to prevent waste.
At the end of the tax year, you to calculate your total inventory value. These calculations include the money you spent on inventory during the year, minus the money you made from goods sold, plus the value of any existing inventory you had at the beginning of the year. This number is your cost of goods sold (COGS), Subtract this number as a business expense from your gross revenue. If you keep clear records of inventory that perished before it could be sold, the cost of this inventory shows up on paper as a higher COGS amount, which reduces your taxable income for the year.
The First-In, First-Out (FIFO) Inventory Method
When you own a business that sells products, including perishable food items, you have a few different options when it comes to how to calculate inventory value. The first-in, first-out, or FIFO method, is often advantageous for companies with perishable inventory, such as yours.
Using the FIFO system simply means you assume the items that were purchased first were also the first items sold. The FIFO system helps regulate your COGS on paper, giving your company a higher profit margin. This system of inventory valuation is helpful if you want to apply for a loan and need to prove your company is profitable. On the other hand, it also means slightly more of your income is subject to taxation.
Perishable inventory demands detailed record-keeping and a solid understanding of Canadian tax law. With frequent inventory counts and smart accounting, your food service business should be off to a good start. Changing up your inventory routine can help your business that carries perishable items account for losses and present a realistic COGS sold on your taxes each year. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.