Food waste directly affects your cost of goods sold and gross profit. There are two ways to handle it in your books, and the better approach depends on how much visibility you want.

The simple method lets spoilage flow through your regular COGS calculation. When you do inventory counts, spoiled product shows up as lower ending inventory. That automatically increases your COGS because you have less on hand than you purchased. This works if waste is minimal and you don’t need to analyze it separately.

The better method tracks spoilage in a dedicated account. Create an expense account called Spoilage and Waste or Inventory Shrinkage under your cost of goods sold section. When product goes bad, debit this account and credit your inventory asset. Now you can see exactly how much you’re losing to waste rather than having it hidden in your overall food costs.

The tracking only works if you capture what’s being thrown out. A waste log is essential. Every time someone discards product, they record what it was, the quantity or weight, and the reason. Was it expired? Damaged? Over-prepped and never used? The waste log creates the documentation you need for accurate bookkeeping and helps you spot patterns that are costing you money.

Physical inventory counts should happen weekly for perishables. Compare what you should have based on purchases minus sales to what’s actually on the shelves. The gap between theoretical and actual inventory is shrinkage, which includes spoilage, portioning errors, and theft. Regular counts catch problems before they compound.

When you identify spoiled product, record it promptly. Waiting until month-end to batch all your waste entries means relying on memory and incomplete logs. Inventory accounting works best when entries happen close to when the actual waste occurs.

For tax purposes, spoilage reduces your taxable income because it’s part of your cost of goods sold. The IRS doesn’t require itemized receipts for every discarded item, but you need reasonable documentation showing the losses are legitimate and business-related. Your waste logs and inventory count sheets provide that support if you’re ever questioned.

The data you collect should inform purchasing decisions. If you’re consistently throwing out the same items, you’re either ordering too much or not rotating stock properly. A good waste tracking system pays for itself by helping you reduce the waste in the first place.

Most Andover, MA payroll service clients in food businesses find that separating spoilage from general COGS gives them the visibility they need to manage food costs effectively. Knowing your waste percentage lets you benchmark against industry standards and set realistic targets for improvement.