Accounting for Circular Economy Business Models: Tracking Reuse, Repair, and Recycling

Let’s be honest. Traditional accounting was built for a straight line. You know the drill: buy raw materials, make a thing, sell the thing, and then… well, hope the customer forgets about it. Out of sight, out of the ledger.

But what happens when your business model is a circle? When your profit depends on keeping products and materials in use for as long as humanly possible? Suddenly, tracking a simple sale isn’t enough. You need to track the second life, the third life, the tenth life of a product. That’s where accounting for the circular economy gets real—and frankly, a bit messy.

The Core Challenge: Value in a Loop, Not a Line

Here’s the deal. In a linear model, assets depreciate to zero. They’re used up. In a circular model, an asset’s journey is more like a series of chapters. A leased appliance gets returned, refurbished, and leased again. A worn-out garment is collected, broken down, and its fibers spun into new fabric. A pallet is repaired a dozen times.

The big accounting headache? Capturing the residual value—the embedded worth—at each stage of this loop. It’s not just about the initial transaction anymore. It’s about the revenue from repair services, the cost savings from reclaimed materials, the brand value of a take-back program. Standard charts of accounts just don’t have neat little boxes for this stuff.

Key Financial Metrics That Need a Rethink

To get a grip, you have to start measuring differently. Think about these:

• Product Utilization Rate: Is that leased tool sitting in a warehouse or actively generating value? Time-in-use becomes a critical KPI.
• Cost of “Circular” Goods Sold (CCOGS): This isn’t just raw material cost. It now includes the cost of collection, sorting, disassembly, and reprocessing. The math gets complex fast.
• Value Retained per Cycle: How much of the original product’s value (material, labor, IP) did you preserve through refurbishment? Tracking this shrinkage per loop is essential for profitability.

Mapping the Financial Flows of Circular Activities

Okay, let’s get practical. How do you actually record these circular transactions? It helps to break it down by the core strategies: reuse, repair, and recycling. The accounting treatment, honestly, varies for each.

1. Tracking Reuse & Product-as-a-Service (PaaS)

This is perhaps the biggest shift. When you sell a light as a service, or lease furniture, you retain ownership. That product stays on your balance sheet as a long-term asset. But it’s a depreciating asset that you actively maintain.

Revenue is recognized over the service period, not in one lump sum. Meanwhile, you’re capitalizing the costs of maintenance and refurbishment. The goal is to stretch that asset’s life—and its revenue stream—over multiple cycles. Your balance sheet gets heavier with physical assets, but your recurring revenue becomes more predictable. It’s a fundamental flip.

2. Accounting for Repair & Refurbishment

Repair can be a revenue stream or a cost center. For a company offering repair services, it’s straightforward service revenue. But for a manufacturer running a take-back scheme to refurbish its own products? That’s trickier.

You incur costs to collect, diagnose, and fix the item. If you resell it, you must match those costs against the new sale. The inventory value of a refurbished laptop isn’t zero—but it’s also not the cost of a new one. You need a new inventory category, something like “Refurbished Stock,” valued at the cost of refurbishment plus a portion of the original residual value. It’s a nuanced calculation that directly impacts your margin.

3. The Complex Ledger of Recycling

Recycling turns waste into feedstock. Financially, it’s about offsetting virgin material purchases. But you can’t just magically reduce raw material cost on paper. You need to track the flow.

Say you collect 10,000 kg of plastic waste. The collection and processing are costs. The resulting recycled granules become a new raw material inventory item, valued at the market rate for recycled content or the avoided cost of virgin plastic. This creates a compelling, tangible line item: “Virgin Material Cost Avoidance.” It’s not traditional revenue, but it’s a massive contributor to both profitability and sustainability goals.

Tools & Frameworks to Light the Way

You’re not starting from scratch. Some smart frameworks are emerging to help structure this chaos.

• Material Flow Cost Accounting (MFCA): This ISO standard helps you track physical material flows and costs through your operations. It shines a light on inefficiencies and the true cost of waste—making the value of circular recovery crystal clear.
• Integrated Reporting (<IR>): This pushes you to explain how your circular model creates value across six capitals—financial, manufactured, intellectual, human, social, and natural capital. It forces the conversation beyond the P&L.
• Digital Twins & IoT: Honestly, the tech is a game-changer. Sensors in products can feed data directly into your ERP system—tracking location, condition, and usage. This live data allows for dynamic depreciation schedules and precise timing for maintenance or take-back.

The Human Element: Changing Mindsets

All the tech and frameworks in the world won’t help if the finance team and the sustainability team are speaking different languages. The real shift is cultural. Accountants need to see a returned product not as a liability, but as an asset-in-waiting. Sustainability managers need to understand the financial implications of a take-back program’s design.

It’s about building a shared vocabulary. A “cost” becomes an “investment in material security.” “Waste” becomes “future feedstock.” This isn’t just fluffy talk—it reframes decisions at the deepest level.

So, where does this leave us? Accounting for the circular economy is still, in many ways, a frontier. The rules are being written in real-time by the businesses daring to operate this way. It requires a blend of rigor and creativity, of holding onto core principles while being willing to redraw the lines on the ledger.

The bottom line? If your business is building a circle, your finances have to spin with it. It’s not just about being green; it’s about capturing the true, looping, enduring value you’re creating—and making sure your books finally tell that whole story.