Chart of Accounts and Plant Costs

I was recently asked how items like ISBN and copyright registration costs should be handled: what accounts should they be in, how should those accounts be tied to the particular title, and how they should get into COGS. (Cost of Goods Sold)

I’m going to start answering this at a simpler level: COGS comes in 3 types. PPB, Royalties, and Plant Expenses. PPB means Paper, Printing and Binding. It usually includes everything on your printing bill. We all know what Royalties are. Plant expenses are those costs where the total expense doesn’t change when the number of copies sold or printed changes. (NB: Plant means something very different outside of book publishing!)

ISBN and copyright would be plant items. So are design, editorial work, etc.

Plant expenditures are recorded as a current asset, until the book is published. At that point, you begin to amortize the total over the expected life of the title. This reduces the asset by a certain amount each month, and moves that amount over to the COGS — Plant account.

Assets accounts usually begin with a 1, liabilities with a 2, equity and retained earnings with a 3, revenues with a 4. Many publishers also assign their COGS accounts to the 4s. Then selling, distribution and marketing are usually in the 5s.
Operating expenses are usually in the 6, 7, and 8 ranges. Extraordinary items, interest and taxes are in the 9s.

If your accounting program allows long enough account numbers, you may want to assign the second through fifth digit to describe the type of item, and the sixth through tenth digits might designate the title.

For example, your chart of accounts might show an account number 1 3510 67890.
This could be decoded to read: 1 = asset.

Next digit: 3 = inventory or plant. (2, 3 or 4 = current asset, 5 through 9 = long-term asset.)

Then comes 510 = ISBN registration. (There’s no common arrangement for these digits, this is just an example!)

And last, 67890 = title id. Usually the end of your publisher prefix, and the title identifier. (Omit the check digit or not, according to taste.)

Let’s suppose, though, that your accounting program doesn’t allow such long account numbers. Then, you may need to employ sub-ledgers. These expand the level of detail you track for a particular summary account. Plant asset records are often kept in a subledger, and only the totals are entered into your general ledger account. Then you can use Excel or something in your accounting package to track individual titles’ accumulated expenditures, and the offsetting amortization.

Combining the information tracked by title for sales, subsidiary rights revenue, PPB, Plant and Royalty expenses, as well as marketing and distribution expenses, will give you a very good handle on which books were successful and which were not. They can help you understand whether or not your projections before the project launched were accurate or not, and sometimes they can even help you pinpoint why one book succeeded and another did not.

All of this is pretty complicated, so please do ask questions in the comments section. You do NOT have to register, just comment away.

14 Responses to “Chart of Accounts and Plant Costs”

  1. allie says:

    Hi, I come across your blog while searching “plant cost”. Could you explain more about “plain cost”? If a book is published under the way of “co-publication”, so the licensee has to pay “plain cost” to the licensor, right? We are a publisher in Taiwan and I handle rights & permissions affairs.

  2. The phrase isn’t “plain cost,” but “planT cost.”

    Co-publishing can mean so many things. If I understand your comment correctly, I think that you are purchasing the subsidiary right (license) to publish a book in Taiwan. If so, and if you are contracting for the right before the original title is published, then you might be asked to share in the costs of producing the book in its original language and country. Some of those costs could be plant costs. This is not a common case.

    When your bring out your edition, you will also have your own plant costs: the cost of the license will, however, almost certainly be a royalty, rather than a fixed fee, and thus NOT a plant cost. But your design, and editorial work on any translation WOULD be plant costs. (The translation might be for a fixed fee — plant, or for royalties — not plant.)

    If the cost doesn’t change with the number of copies you print or sell, then it’s plant. Otherwise, it’s either PPB or royalties, or perhaps not a Cost of Goods Sold at all.

    Does that help?

  3. […] Chart of Accounts and Plant Costs « The Profitable Publisher […]

  4. Perry says:

    Hi, Marion, I landed here from a link on a Quickbooks forum…I’m pretty sure that we met during the 2010 Publishers University in New York during one of the speed-question sessions (and thank you for answering my question!). Just curious how you treat COGS for non-inventory items, ie print-on-demand books. Most of our book sales are printed and drop-shipped on demand.

    • I think we may have met there, as well. Welcome to the neighborhood!

      POD printing doesn’t really change the issue, except that you don’t ever have to send the books through inventory and they never show up on the balance sheet.

      You still have royalties and plant costs, of course. They are booked exactly the same as always. And you amortize the plant costs over the expected life of the book (as in, the period over which you expect the sales to be fairly strong).

      But the printing expense for each book goes straight to COGS (the PPB part of it), rather than into inventory and from there into COGS.

      Does that help?

  5. Perry says:

    Thanks, Marion. That’s how I’m tracking it, too, with POD PPB entered against COGS.

  6. Dale says:

    Hi Marion. I happened to find your blog while looking for some help with this very issue. It’s quite helpful, but what still puzzles me is how the actual inventory accounts for books are handled.

    It seems like PPB and Plant Costs should be factored into the value of book inventory, but if so then wouldn’t those costs be expensed somehow when books are actually sold rather than amortized? I’ve read elsewhere that plant costs are actually treated as lump-sum deductions from revenue at the time of sales rather than being expensed by category, but the information was not specifically geared to the publishing business.

    What would be helpful, I think, would be a set of entries that shows how the money moves from start (key types of production costs) to a finished product in inventory and finally to income/expense entries after a sale is made. If you have the time and inclination to provide such, I would greatly appreciate it. Thanks!

    • Hi Dale,

      Thanks for the compliment. Your question is common, and many, many people who don’t know publishing accounting well do it just that way. But it’s not only against the regs in FASB, it’s also not a good idea from a management accounting viewpoint as well.

      PPB does go into inventory, but plant doesn’t. It’s capitalized as any product development cost would be. If you did it the other way, it often leads to very expensive mistakes in assessing the relevant costs for a variety of decisions.

      Some publishers did, once upon a time, deduct all plant costs when the books went on sale. This was advantageous from a tax view point, and there was at least some justification from a FASB POV as well. But the IRS came down **very** hard on that, and it’s not done that way any more.

      The journal entries would be helpful for those who do this sort of thing. I’ll try to remember that for the next time I have time to blog . . . . Which is getting increasingly hard now that I run 3 of the larger social media groups for publishers. (For free. How dumb am I??)

      • Dale says:

        Hi Marion,

        Thank you for the quick reply and the email. That probably will help me get it right, although the journal entries would be useful, too, if and when you get the time. (As I’m starting a small publishing business in addition to working my “day job,” being daddy and grandpa, and a juggling a few other interests on the side, I know how that goes!)

        Just to sum up, if I understand you correctly the inventory value of a book is the PPB cost for the book, which is expensed upon sale of the book, whereas Plant Costs are amortized over a year or two or three depending on the expected “life” of the book. If that’s right, then with luck I can at least get started.

        Thanks again!

        • You’re more than welcome. (I, too, devote a ton of time to non-book-related things, like family! I just take the pro bono time out of the hours allotted to the book business, which leaves me zilch for blogging, or working on my next how-to ebook or . . .)

          And you’re also right about the way to handle the inventory, and the COGS. You can also amortize the plant in something other than a straight line. There are lots of IRS approved ways, but personally, I don’t see the point of doing the extra work. Once your company is at a steady state, producing a similar number of books and similar plant costs each year, your tax bill will be about the same each year no matter which method you’re applying. It’s only at the growing or shrinking part of the life-cycle that it changes things.

  7. JW says:

    Marion-

    Awesome accounting explanations in this thread. I own Thomas Woll’s book “Publishing for Profit”. He explains the Title P&L statement and enough basics to give a general understanding of the accounting process for publishers. With the transformation of digital content for delivery in all published formats (print, audio, video, etc), what do you recommend to stay current in terms of an on-going accounting/financial/tax planning education for a small, independent publisher? Books, online courses, etc.

    Once again, super job in simplifying the concepts for those of us who may not be accountants, but do love publishing and need to grow with the changing environment of the world of ISBN/EAN related products. Thanks!

    • JW-
      Thanks for the compliments. Sorry for the delay in responding, but I’ve been traveling, and an iPhone is just not a good access point for blog entries!

      I don’t know of any courses or books that I would recommend (other than Tom’s) for the continuing education of a financial person. Well, there’s one other little addition to the list: I do have a monograph out in ebook format on one single topic, but haven’t had been able to free the time to collect and edit together some of the other pieces I wanted to offer, or to write the completely new pieces to the series.

      If you have a solid understanding of the principles of accounting, you’ll be able to apply them to book publishing, and not make too many errors. The changes with the ongoing digital revolution seem to be in the number of copies sold per title (which is dropping, sad to say), in the length of time over which a title can profitably remain available (longer, but the bulk of the sales are still likely to be happening in the first few months of its life, OR in the first few months after a major uptick as some social media-based popularity takes hold), and in the drastic reduction of the variable cost components of COGS.

      I haven’t seen any consensus emerging on what that means for the usual ways to amortize fixed costs or any of the rest of the minutiae of representing reality in your accounting records, though.

      If you have any niggling little questions, you can always find me in one of the groups I help run on-line and ask them. (Those groups are the Yahoo Group called Self-Publishing, Pub-Forum (at Pub-Forum.NET) and on Linked-In: the Self-Publishing subgroup of the Ebooks, Ebook Readers, Digital Books and Digital Publishing group. None of them are really about SELF-publishing, as much as they are about the who, how, why and what of being a micro publisher. Of course, any small publisher can apply most of the material as well.

  8. Carrol says:

    With havin so much content do you ever run into any problems of plagorism or copyright infringement?
    My website has a lot of unique content I’ve either created myself or
    outsourced but it looks like a lot of it
    is popping it up all over the web without my agreement.

    Do you know any methods to help prevent content from being ripped off?
    I’d really appreciate it.

    • Google alerts help locate the content (look for unusual phrases).

      When you find the infringers, send them a DMCA form letter, and if they don’t remove it within a day or two, send that form letter to their ISP. You can find the appropriate contact info by using a “whois” search, or using a DNS database to search for the relevant info.

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