Canada Question about amortization and cost of goods sold

[Johnnyb47]

So according to my accounting manual;

Product costs are essentially the costs that are included as a cost of inventory and recorded as an asset until the product is sold. Once the product is sold, the product costs are moved to cost of goods sold. As a result of being a cost of inventory, product costs may be incurred in one period but not expensed on the income statement until a later period.

And also considering that “Depreciation of manufacturing equipment” is part of the product costs.

It logically means that DEPRECIATION would remain a “cost of inventory” if no sales have been registered during the period?

This is very illogical to me because that means that if a manufacturing company used up its equipment to produce all year long but made no sale whatsoever, we wouldn’t debit a depreciation in the income statement. Therefore, the equipment asset value wouldn’t be reflecting reality because the accumulated amortization would not have been credited in the assets section.

Any kind soul to enlighten me because clearly, I am missing something here.

Thank you so much in advance.

 

[Dave In Capital]

First you want to consider the conceptual purpose of depreciation. In this case we would start with the matching principle of accounting: revenues must match related expenses. Thus, depreciation has the fundamental purpose of matching the cost of the asset to the benefit derived from its use.

If no sales are made, then the company has not received a benefit from using the asset. Therefore, it would be inappropriate to derive a tax benefit from depreciation expense since no gains were realized in relation to the underlying asset.

Another parallel would be determining the fair market value (FMV) of inventory that cannot be sold. Under mark-to-market guidelines, the value would be zero regardless of cogs. The entity would then realize the tax benefit of cogs with depreciation included when it reports the loss on the p&l. The JE for market adjs to inventory when FMV is below cost would be:

Dr. Inventory -Write Downs
Cr. Inventory