Journal Entry for Donated Goods
Goods donation is the process that company provide their goods to nonprofit entities for free. It also happens when companies donate directly to the community such as schools, libraries, and other religious groups.
The company purchase goods with the intention of sale back for profit. They will sell the goods at a higher price compared to the purchase price. The difference between the cost and selling price is considered as gross margin.
These goods will be recorded as the inventory on the balance sheet. When the goods are sold, they will be moved from the current asset to the cost of goods sold on the income statement. This cost will directly reduce the company revenue and arrive at a profit at the bottom line.
Besides making a profit, company also has the obligation to reduce the negative impact that they have made on the environment, community, and other impacts to stakeholders. The company usually creates some social impact such as pollution, an increase in carbon footprint, and impact on the surrounding environment.
In order to improve the brand name and company image, management decides to give back to the community. There are many forms of contribution such as cash donation, goods donation, and donation to the nonprofit organization.
The donated goods will be recorded as the expense on the company financial statement. The company has to record only the cost of inventory, the opportunity cost that company can receive from selling the product will be ignored.
Journal Entry for donated goods
When the company donates goods to other parties, they have to remove the inventory from the balance sheet as they are no longer under company control. The inventory has to move to the expense on the income statement. But instead of the cost of goods sold, they have to record it as the donation expense.
The journal entry is debiting donation expenses and credit inventory.
The transaction will decrease the inventory on balance sheet and increase the expense on the income statement.
Company ABC is a cloth manufacturer that produces various types of products for the customer. During the year, company decided to donate 10,000 units of clothes to the community that suffer from the natural disaster. The cost of inventory is $ 30,000, and the company may be able to sell them for $ 50,000. Please prepare the journal entry for donated goods.
When the company donates goods, they have to reverse them from the balance sheet and record them as an expense.
The amount recorded depends on the cost of inventory, not the expected revenue. The journal entry is debiting donate expense of $ 30,000 and credit inventory of $ 30,000.