By- products

Definition of by-products :

They are products manufactured from the same raw material as the main product with less prices .

During the process of  manufacturing main products in the wood industry , there is a by- product which is  the sawdust . This is also applied to the oil industry and food industry ...etc . 

What is the accounting treatment of by-products:

There are a lot of accounting treatments of by-products . Here we will discuss two of them :

First : By-products are classified as free secondary revenue that should be listed in the income statement as a source of revenues . This treatment matches the accounting standards .

The entry here is 

After that I list the by-product revenue independently in the income statement .

Second : Here the by-product revenue is a reduction of the cost of the main product . Namely that if the main product cost is 10 pounds and the price of by-product is 2 pounds  , then the main product cost is reduced to 8 pounds .

Another question !!!

Is it different to classify this revenue as an independent revenue or as a cost reduction ?

The answer is ,

Yes , it is . According to the selected treatment I will use two different figures in the income statement which are the sales cost and the gross profits . They are used to assess operating and decide if there is a realized earning from the products or not  .

Suppose that I have a wood manufacturing factory . The product price is 150000 pounds and its production cost is 50000 pounds . There are marketing , administrative and general expenses of 30000 pounds . A by -product is produced ( sawdust ) of 10000 pounds  . The first  income statement will be as follows :

150000 net sales 

Deduction

50000 sales cost 

-----------------------

100000 gross profit

30000 marketing and administrative expenses ( deduction )

70000 operating profit

10000  by-product revenue 

------------------------

80000   net profit

The second income statement is :

150000  sales revenue 

40000 sales cost  ( 50000- 10000 )

11000 gross profit 

30000  administrative expenses deduction 

------------

80000   net profit 

Genius - accountant #

Can you suggest an accounting treatment of by-products ?