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Expired Drugs: Cost you plenty

Expired Inventory in a Pharmacy is costing you money. Do you know how much?


Expired pharmacy inventory is a surprisingly complicated sequence of financial transactions that is rarely discussed, and, therefore, probably not well handled in many pharmacies.  The importance of handling this correctly has impact on the Balance Sheet, the Revenue and Expense Report, and presumably taxes paid. If you pay taxes on profits, make sure to ask a few more questions about how your inventory is handled.


To start: Inventory is an asset. What is the importance of that statement?  Because it is an asset, it is not considered an expense until it is sold, or otherwise disposed. It does not affect the Revenue and Expense report. That is, a business can “trade” its cash (an asset) for inventory (another asset) without making a sale; thus, not incurring an expense.


When a drug expires, there needs to be a financial transaction that turns it from an Asset to an Expense. Many companies will use an account associated with inventory shrinkage. Based on the cost of drugs these days, we recommend to our clients that a sub account of expired inventory be created to track this over time.


If you already do this, congratulations. You are in the minority. But, the process doesn’t stop there. It gets harder. In real life, after someone finds the expired drug on the shelf, they throw it in a box labeled “Expired”.  Because of the environment, and the possibility of a credit, that box gets sent to or picked up by a “Reverse Distributor” also referred to as a returns company. From here, the mystery begins.


After a Reverse Distributor picks up your expired meds, they sift through it and determine if any of it can be “sent back” to the manufacturer for credit and then they dispose of what they can not return for credit. Typically, they will charge a disposal fee for the pounds of disposal they process, and a processing fee for sorting out the expired drugs and garbage. They also determine what the credits will be from the manufacturer for you.  This is great service, admittedly, especially when you factor in the value of the disposal and tracing paperwork for controlled substances. Then, you receive a document (part bill, part credit notification). The manufacturers have different policies about issuing credit. Some may send you a check. Some may issue a check to your wholesaler, so you can be given a credit. Therefore, even tracking the ultimate credit becomes complex.

Complicated?  Yep. Here’s what that looks like in a hypothetical example.


Your staff just put $1000 worth of expired drugs in the box and sent to the reverse distributor. There is a $100 credit issued for the return from the manufacturer, and $50 fees for processing. These are the steps we need to manage:


  • Decrease Inventory by $1000

  • Increase Inventory Shrinkage account (or Expired Drugs subaccount) by $1000

  • Reduce COGS for $100 and reduce the Inventory Shrinkage account to reflect that it was not all waste.

  • Invoice $50 to reverse distributor which ends up in Contractual Services, or similar expense account.



A sample Journal Entry may be:



Account

Debit

Credit

Purpose

Inventory Asset

1000


Reduce Inventory

Inventory Shrinkage


1000

Recognize expired Inventory value

COGS


100

Attribute a credit earned to sales from the period

Inventory Shrinkage

100


Reduce the shrinkage account based on credit

Contractual Services

50


Pay for the service of the reverse distributor

Accounts Payable


50

Send the funds to reverse distributor



This journal entry was simplified a bit compared to how many organizations would handle the bills and checks. The actual movement of the transactions are more detailed and routine as a bill is entered then later paid, or cash or credit is received, then later deposited or applied to an account.

For more ideas like these, check out our blog at www.IndispensableHealth.com