Are Artworks Considered Inventory?
I’ve been pondering a conundrum and am eager to hear thoughts from the Bookkeeping community outside the art industry.
As a fine artist managing my own finances with QuickBooks, I categorize the supplies I purchase to create paintings as a Cost of Goods Sold expense. These supplies are used over time to produce paintings, which may eventually sell, though this can take years. Sometimes, paintings go to galleries and are sold on commission, often resulting in 50% of the retail price going to the gallery.
Key Questions
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Categorizing Finished Paintings
Should finished paintings be classified as Inventory Assets, given that they may not convert to cash within a year? Would they be considered long-term or “other” assets? What happens if a painting never sells? -
Gap Between Material Costs and Market Value
The cost of materials is usually far less than the painting’s market value. How should I account for the discrepancy between expenses and revenue? While valuing artwork goes beyond Bookkeeping, there are unpredictable factors: discounts offered to collectors or delayed payments from dealers are common occurrences. -
Supplies as Assets
Should supplies on hand, which sometimes take years to use up (like oil paints), be considered assets? Would they fall under long-term or “other” assets?
Ultimately, I’m interested in reflecting the true value of my business through inventory assets. However, if these assets cannot be quickly converted to cash, should they still be emphasized on the books?
Appreciate any insights!
One response
Navigating the world of Bookkeeping for artists can indeed be complex, especially when it comes to categorizing artworks and supplies. Here’s a detailed breakdown based on standard Accounting principles, and I’ll address each of your questions separately:
1. Categorizing Finished Paintings as Inventory
Inventory Asset vs. Long-term Asset:
– Inventory Asset: Typically, businesses categorize items they intend to sell as inventory. In your case, this would mean recording your finished paintings as inventory assets. Inventory is generally classified as a current asset because it’s expected to convert to cash within a year. However, art pieces can often take longer, which leads to some flexibility in reporting.
– Long-term or Other Asset: If you believe it will take longer than a year to sell a painting, or if the artwork may not sell at all, you might consider categorizing it as a long-term asset or even “other” assets, depending on your Accounting system’s options and your preference for financial reporting.
2. Accounting for the Cost vs. Market Value Gap
Recognizing Expenses and Revenue:
– The materials cost is indeed much lower than the market value of the painting. In accounting terms, this is similar to any manufacturing business where the cost of inputs doesn’t directly match the final sale price.
– Revenue Recognition: Upon sale, recognize the full sale price as revenue.
– Expenses: The cost of materials used is recognized as part of Cost of Goods Sold (COGS) when the painting is sold.
– Profit Margin: The difference between the sale price and COGS becomes your gross profit.
– Discounts and Delays: For dealer discounts, record the net amount received. For delayed payments, consider these as receivables.
3. Categorizing Supplies on Hand
Inventory or Supplies Asset:
– Supplies as Assets: If supplies like oil paints are held for a long time before use, they might be considered a type of raw material inventory or classified as “supplies” under current assets.
– Long-term or “Other” Asset: Since these supplies won’t be converted to cash directly but used to produce art assets, you might categorize them according to how you forecast their usage rate.
Understanding Business Valuation with Inventory
Business Valuation:
– While inventory and supplies might enhance the overall perceived value of your business, accountants often focus on tangible results – i.e., actual sales and cash