Looking for correct term

[qlopp]

Hi,

I enter basic bookkeeping data for my small business and often must explain to my accountant what "kind of" cost I am talking about. In this particular case I ran into a new situation and would love to know what classification this purchase would be considered.

I damaged a part while installing it and had to purchase the same part a second time to complete the job. The first time the part was purchased it was simply classified as "part' (I'm sure accountants have a better term for this but in my case a "part" is any tangible component that is sold to the customer during the course of a repair job). Now that I have purchased the same piece again but did not sell it; should it be classifed as damaged goods replacement, or? Thanks!

 

[Truemanbrown]

I would just include it as a 'part'.

 

[qlopp]

I would just include it as a 'part'.

But parts get sold and taxed; they are also counted on as a component of the gross profit equation. I would think that a damaged replacement should count against profit via special designation. Clearly the ways of accountancy are well above my understanding, but I can't help to wonder what all of the classifications are for if not specific circumstances like this one.

 

[cricket68]

It is just another part.

Because you cannot charge your customer, your company will have a cost that is not matched by a revenue and so the profit on the "job" will be reduced (or even turned into a loss).

If you treated it as "repair overheads" it would still reduce the bottom line profit but it would be an expense rather than in cost of sales.

So the net effect is the same; except if for management accounts. If you want t price each job up you need to attribute the new part to that "job"

 

[ArcSine]

But parts get sold and taxed; they are also counted on as a component of the gross profit equation. I would think that a damaged replacement should count against profit via special designation. Clearly the ways of accountancy are well above my understanding, but I can't help to wonder what all of the classifications are for if not specific circumstances like this one.

Your intuitive view is correct. Instead of charging / capitalizing the cost of both parts to the job, I'd charge off the damaged one to a separate expense account; some account established to capture the costs of damaged items would do the trick.

Then just charge the cost of the replacement part to the job, as you would any other part.

The client should only be charged for one part; the job should reflect a normal gross profit (not an artificially low GP because the damage); and damages should be captured in a separate account for informative purposes. The suggestion above is one way to accomplish all three.

As a separate note, that "damaged parts" P&L account could either appear as a separate line item in the gross profit area of the P&L (i.e., NOT buried in the aggregate gross profits of the jobs), or further down the P&L as an operating expense; whichever is more meaningful to management.