Business Accounting - theoretical question - not real.

[ExtraSlow]

Have a question that is for sure 100% theoretical and not based on anything that has happened or will happen in the real world for any business.

So when your business sells a physical product, you have some cost of manufacturing that product and getting it into your inventory, and I'll call that a "cost of goods sold". Then when you sell it, you have a revenue amount, and your revenue minus your cost of good sold (and other direct costs) is your gross margin for that sale. I think that's about correct.

But when happens when you sell something that was a capital asset of the company, which now has a depreciated value? Do you just basically use that current depreciated book value as your cost of goods sold, or is it treated differently? Assuming of course that this capital asset is fully owned by the company, and there's no debt or liability associated with it. What would you call the "gross margin" on a sale of a capital asset? Is that the right term?

[ThePenIsMightier]

I think...
I think you estimate its value based on a CCA depreciation and you better be selling it for above that dollar amount, otherwise they assume you're trying to hide profits and taking fictional losses to avoid tax.
*something very roughly along those lines.

[birdman86]

It wouldn't have any impact on your gross margin. There will be proceeds on the sale (cash inflow from investing, which increases the assets/cash balance on your balance sheet), and a reduction of the balance sheet assets (PP&E probably) by the book value of said asset. The difference between the two that keeps the BS in balance would be reported as a gain/loss on sale, which is below operating income (non-recurring items) but hits net income. If it has an outstanding loan there's a couple extra steps but the principle is the same.

That's the corporate answer...small businesses and CCA and all that have their own wacky rules so idk if they're any different.

[Buster]

I don't think most accountants would categorize that into COGS

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It wouldn't have any impact on your gross margin. There will be proceeds on the sale (cash inflow from investing, which increases the assets/cash balance on your balance sheet), and a reduction of the balance sheet assets (PP&E probably) by the book value of said asset. The difference between the two that keeps the BS in balance would be reported as a gain/loss on sale, which is below operating income (non-recurring items) but hits net income.

That's the corporate answer...small businesses and CCA and all that have their own wacky rules so idk if they're any different.

This is the correct answer

[Doozer]

dammit, too late, better responses above while I was typing.

[birdman86]

What would you call the "gross margin" on a sale of a capital asset? Is that the right term?

I think if you’re looking for a performance metric on selling capital assets you’d want to look at things like ROE, ROIC, ROA, maybe debt/equity. Things that ask the question “how much profit am I generating by investing $X of cash in the business?”

[ExtraSlow]

Okay, not COGS.

Thanks Birdman. I'm not an accounter, and I had to read your answer five times, but I think I know what you are talking about.

[ExtraSlow]

I think if you’re looking for a performance metric on selling capital assets you’d want to look at things like ROE, ROIC, ROA, maybe debt/equity. Things that ask the question “how much profit am I generating by investing $X of cash in the business?”

for the specific case that is for sure not related to anything in the real world, it's a little weird, but I suspect one of those would work.

[suntan]

You have to HELOC that shit.

[dirtsniffer]

for me replacement value and cash is important. If something is obsolete and won't generate revenue why keep it on the books? Many assets are fully depreciated and still make a ton of money and if it was sold it, it would likely be replaced with a higher cost unit. Maintenance costs and up time may be applicable as well. No comment on where it ends up on the balance sheet.

[pheoxs]

for me replacement value and cash is important. If something is obsolete and won't generate revenue why keep it on the books? Many assets are fully depreciated and still make a ton of money and if it was sold it, it would likely be replaced with a higher cost unit. Maintenance costs and up time may be applicable as well. No comment on where it ends up on the balance sheet.

This is more or less how I view it. Just depreciate it all and get it off the books. Run it until it dies or maintenance outpaces its use then replace it if needed.

[ExtraSlow]

Agree with dirtsniffer about the smart way to operate a business regarding capital assets that may be at or near the end of their useful lifespan. That part is super clear to me. The business strategy is the part I understand.

The way to account for things on the books, the "accounting" if you will, is what fucks me up for these very theoretical questions not related to any actual company or business.

[pheoxs]

Agree with dirtsniffer about the smart way to operate a business regarding capital assets that may be at or near the end of their useful lifespan. That part is super clear to me. The business strategy is the part I understand.

The way to account for things on the books, the "accounting" if you will, is what fucks me up for these very theoretical questions not related to any actual company or business.

As far as I know.

Buy asset for 50k, depreciate it over the years to 15k. Sell it for 20k. Then you'll have 5k of additional revenue that year. Whether its 20k revenue with a 15k expense or just 5k in revenue is all the same to company accounting.

From a tax planning standpoint I'd rather depreciate it as fast as allowable because it means I get all those deductions in earlier years. No reason to keep the value inflated on the books unless you are trying to inflate your business' value (investment / partnership / stock sales / etc).

[ThePenIsMightier]

If you're an engineer and you need to do accounting and think like an accountant, it's simple.
Just think like an engineer, then take away reason and accountability.

That's as good as it gets.

[dirtsniffer]

the "accounting" if you will, is what fucks me up for these very theoretical questions not related to any actual company or business.


If you're an engineer and you need to do accounting and think like an accountant, it's simple.
Just think like an engineer, then take away reason and accountability.

That's as good as it gets.

hahaha perfect.

[suntan]

As far as I know.

Buy asset for 50k, depreciate it over the years to 15k. Sell it for 20k. Then you'll have 5k of additional revenue that year. Whether its 20k revenue with a 15k expense or just 5k in revenue is all the same to company accounting.

From a tax planning standpoint I'd rather depreciate it as fast as allowable because it means I get all those deductions in earlier years. No reason to keep the value inflated on the books unless you are trying to inflate your business' value (investment / partnership / stock sales / etc).

Yes you absolutely want to depreciate assets as quickly as CCA allows, especially if you paid cash up front for the item.

[ExtraSlow]

As usual my highly theoretical and irrelevant questions have stimulated great debate and information sharing.

[bigboom]

As far as I know.

Buy asset for 50k, depreciate it over the years to 15k. Sell it for 20k. Then you'll have 5k of additional revenue that year. Whether its 20k revenue with a 15k expense or just 5k in revenue is all the same to company accounting.

From a tax planning standpoint I'd rather depreciate it as fast as allowable because it means I get all those deductions in earlier years. No reason to keep the value inflated on the books unless you are trying to inflate your business' value (investment / partnership / stock sales / etc).

There's no other way to do it other than depreciate it according to CRA schedules for depreciation based on your asset class, there's no real way to skip depreciation. As long as you are using the asset there's no real way to get it off the "books" as you need to have that asset represented on the balance sheet. With the depreciation being % based it never really disappears unless the government provides special incentives to spur capital investment which we have seen in class 29.

Revenue never gets touched in the accounting entry, it all hits your asset, accum. depreciation, cash and gain/loss accounts. As stated by Birdman the gain/loss does hit your income statement though it just isn't used to calculate your operating profit/loss, it's shown below the line.

Typically when reviewing a capital asset I'll take a look at the ROI it's given us to see if that machine was a worthwhile purchase and that's where the salvage/selling value of the machine comes into play.