AGA Today

Federal Accounting Corner

Cost of Goods Sold
The two different accounting models for the sales of assets are inventory sales and asset disposal. Most private-sector companies use the first model extensively, while most public-sector agencies use the second model exclusively. Treasury's guidance in the transaction definitions mixes the two together (entries C630-C634, C644-C646 and C648), so I wanted to focus on them.

Budgetary Entries
When the cash collected affects the budget, a budgetary source is debited (such as 4266 Other Actual Business Collections from Non-Federal Sources) and a status (for example, 4450 Unapportioned Authority) or an anticipation account (for example, 4060 Anticipated Collections from Non-Federal Sources) is credited. If a sale is made to another federal agency on credit, a receivable budgetary source (such as 4287 Other Federal Receivables) is debited instead. If a sale is made to the public on credit, no budgetary accounts are posted. Since the budgetary entry is the same for both disposals and sales of inventory, I am not going to discuss them further.

Disposal Transactions
When assets are sold in a transaction that is not part of an entity's line of business, the gain or loss is explicitly recognized at the time of the sale. On the proprietary side, cash is debited, the asset is credited, any associated allowance account is closed out with a debit, and any remaining amount goes to a gain or loss account.

Here is an example of the proprietary entries for equipment that had been originally purchased for $900, incurred $750 in depreciation, and was sold for $300:

Debit 1010 Fund Balance with Treasury                                        $300
                        1759 Accumulated Depreciation on Equipment                         750
                        Credit  1750 Equipment                                                                   900
                                7110 Gains on Disposition of Assets - Other                                150

Here is an example of the proprietary entries for excess inventory that was valued at $200 but sold for $75:

Debit 1010 Fund Balance with Treasury                                        $75
                        7210 Losses on Disposition of Assets - Other                                 125
                        Credit  1524 Inventory - Excess, Obsolete, and Unserviceable           200

Inventory Transactions
When an entity's business is to sell assets, and these are sold, the gain or loss is implicit. The asset is moved to an expense account (cost of goods sold), the revenue is recognized, and the profit or loss is calculated along with other activity on the Income Statement (for the federal government, the Statement of Net Costs). So, if inventory that cost $265 is sold for $300, the entry would be:

Debit 1010 Fund Balance with Treasury                            $300
                        Credit  5100 Revenue From Goods Sold                          300 

Debit 6500 Cost of Goods Sold                                         $265
                         Credit  1521 Inventory Purchased for Resale                     265

Entries C644, C646 and C648 show the gain and loss accounts being posted, but has a note that entry E408 should also be used for cost of goods sold. It would be more precise to say that only certain accounts should use E408 and these should not use the gain or loss accounts. Entry E408 lists three accounts that use the inventory model: 1521 Inventory Purchased for Resale, 1527 Inventory - Finished Goods, and 1561 Commodities Held Under Price Support and Stabilization Support Programs. In addition, entry C630 shows account 1572 Stockpile Materials Held for Sale converted to 6500 Cost of Goods Sold, but entries C632 and C634 show no Cost of Goods Sold posting and instead post to 7110/7210 Gains/Losses on Disposition of Assets - Other.

Conclusion
The account 6500 Cost of Goods Sold is mutually exclusive with 7110 and 7210 Gains/Losses on Disposition of Assets. Only items held with the intent to sell them should use the Cost of Goods Sold account. Other asset disposals recognize a gain or loss at the time of the sale. I realize that SFFAS 3 paragraph 55 states that, "The cost of stockpile materials shall be removed from stockpile materials and reported as cost of goods sold when sold. Any gain (or loss) upon disposal shall be recognized as a gain (or loss) at that time." However, I believe the gain or loss is recognized by reporting it on the Statement of Net Cost, not by posting directly to a gain or loss account; otherwise, the asset couldn't be moved to cost of goods sold because there would be no offsetting revenue recognized. —Simcha Kuritzky, CGFM, CPA