Two Ways to Address Fluctuating Gold Prices When Accounting Inventory

I’m often asked how to account for the fluctuations in gold prices in inventory.

The simple answer: You don’t.

As for the longer answer, let’s start with definitions. Inventory is what you have on hand for production or sale and lives on your Balance Sheet. Cost of Goods Sold (COGS) is inventory that left with a customer and shows on your Profit & Loss report (Income Statement). “Writing inventory up or down” is slang for moving value between these two reports, and it’s often misused when people try to chase commodity pricing.

Business owners, jewelers included, like seeing healthy Assets on the Balance Sheet. That doesn’t mean you raise the book value of inventory just because the gold market keeps climbing. Think of your home: What you paid is your cost; market price is just a possibility until you sell. Same with jewelry.

Inventory should be recorded at the lesser of your original cost or current market value. Here’s the crucial part that trips people up: You can write inventory down multiple times, but you can only write it back up ONCE in an annual reporting period and only reverse a prior write-down.

If you’re valuing your stock monthly and gold is higher than when you bought, you cannot increase the cost on your books to match the spike. That increase is part of your profit margin, provided you increase your sale prices accordingly.

If gold prices drop below what you paid, you can write your inventory down by expensing the difference to a “Loss on Inventory” account. That lowers profit because you didn’t have Sales Income to cover it. If the market later recovers within the same year, you can reverse that loss, but only up to your original cost. You can’t over-inflate Inventory with cash you didn’t spend. The reversal simply reduces the prior loss, lowering costs and lifting margin.

Now, a year-end scenario. Suppose you compare the inventory cost to the market value at year-end, see a drop, and expense the loss, resulting in lower profit and taxable income. Yay, less taxes THIS year!

But next year, when you sell those goods and the market has recovered, you can’t write them back up to your original cost if there’s no current year loss to reverse. You already took the expense last year, which means you have fewer expenses to offset income that year. Yep, MORE taxes. Keep inventory at the price you paid, and expense the cost when you sell the goods. This steadies the bottom line.

The better question: How fast can you raise prices to keep up with the market? Your selling price should align with replacement cost, so your margin is there for the next purchase. Your books do not chase spot, but your price tags should. Think: “COGS is history, pricing is strategy.”