Hope you are doing well.
I have a few questions about the inventory of virtual products, like e-books, and even add-on payments for freemium online games where you have to pay to get particular upgrades and tools.
My questions are:
If you are a chair production manager and you have 10 chairs in inventory, each worth $100, then you’ll have a chair inventory of $1000. We can’t use the same logic when trying to account for e-books and video game add-ons, because, even though consumers are likely to buy each thing only once, the stock for the virtual product is endless, infinite. The e-book will never go out of stock for other people to buy after you purchase it. My question is: how do you do the accounting for the inventory for that? There is infinite stock, and on the balance sheet, if you only sell 1 book, the only book which you digitally publish, you can’t write in “E-book Value * Infinity” to get inventory of this e-book. So how does it show on the balance sheet?
If you had more than one e-book you were selling, how would you account for those? “E-book 1 Value + E-book 2 Value etc…”? Then we come to the same question again about infinite stock, and how to account for that.
For paper backs and hard covers, when you are determining the cost of goods sold, you have to factor in labor and whatever utilities you needed. You need to factor printing and the raw materials that make a book. When you write an e-book, you still have labor and utilities but no raw materials. So you technically save a lot on cogs; we could still consider the letters on your screen to be the raw materials, your structuring of the story as the work in progress inventory, and the final pdf as your finished goods inventory. If you only do this activity once, and the rest is just mechanical through online market places, how do you do the accounting for that? There was a full COGS only once for the virtual product when it was created, then for every subsequent product sale there isn’t really any cogs.
Have a good day!