Some of the fiber costs can be fairly significant. I'm wondering if this is better to account for as a fixed asset.
Please provide your feedback.
Where I work, all fiber and cabling costs are posted to inventory and then expensed to cost of goods sold as a customer job is complete. Is this the best accounting practice?
Answers
I'm confused with the statement or question.
You purchase fiber optic cable for work as a cable installer. Upon receipt you debit Inventory and Credit A/P.
When you do a job, you credit Inventory and debit Cost Of Golds Sold.
So you've included the cable as an asset, and then when sold (either as a separate item or included in a flat rate) you've captured the expense (and relived inventory).
Nothing wrong here (except if you are not pricing/costing/selling correctly).
What else is there? Nothing...
1
My question is on the second step. If it better to credit the inventory and debit fixed assets (to capitalize) instead of expensing.
I am in agreement with Wayne. The customer could possibly include the cost that was paid to your company for the cabling and wiring if it was determined that it will extend the economic life of a particular asset, such as new wiring for a construction job. Even to that extent, the construction contractor would not include the cost in their fixed assets, it would be job cost. The end customer is the only one that has a fixed asset in your situation. A caveat to that would be if your company installed cabling and wiring in its facilities.
Aside from it not aligning with any GAAP rules, if you accounted for the cabling as a fixed asset, then each time a portion is sold to a customer, you would have to recognize a capital gain on the sale of an asset. Surely the company is not holding onto its inventory for more than one year, therefore the capital gain will be taxed as ordinary income because it would be considered a short-term capital gain.
I think your question does not give all the facts needed. If the cabling/fiber are part of something sold to customers, follow Wayne’s advice. If you are creating something to be used in your company to service a customer, it would go in fixed assets rather than COGS. For example, if you are setting up data bases to service customers, this would be a fixed asset.
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Accounting