1. Introduction and Objectives
By-products are secondary products of low financial value that are generated inadvertently during the production of primary joint products (e.g., sawdust produced at a lumber mill). This lesson outlines the two main approaches used to account for by-product revenues under global accounting guidelines.
 
2. Structural Accounting Treatments
  • The Production Method (Net Realizable Value Approach): The expected value of the by-product is recognized at the moment it is produced. The estimated NRV of the by-product is deducted directly from the main joint production costs. This approach reduces the inventory value of the primary products on the balance sheet.
  • The Sales Method (Other Income Approach): The by-product is ignored during production and carries no inventory value. When the by-product is eventually sold, the revenue is recorded directly on the income statement under Other Operating Income or as a minor reduction to the Cost of Goods Sold (COGS).

 
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