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    Accounting Standards Library
    Wednesday
    Feb272013

    How do I write down inventory?

    If you discover obsolete inventory, you should write down its value in the accounting records to the value at which you can dispose of it. This should be done at once, so that the financial statements immediately reflect the reduced value of the inventory. Otherwise, the inventory asset will be too high, and so is misleading to the readers of a company's financial statements.

    For example, if a widget costs $100 and you can sell it to a scrap hauler for $15, then you should write down the value of inventory by $85. There are two ways to write down inventory. First, if inventory write-downs are not significant, debit the general cost of goods sold account and credit inventory, as shown in the following entry:

      Debit Credit
    Cost of Goods Sold 85  
         Inventory   85


    Alternatively, if inventory write-downs are significant in size, record the expense in a separate account, so you can track their aggregate size. This should be a debit to inventory write-downs and a credit to inventory, as shown in the following entry:

      Debit Credit
    Inventory Write-Downs 85  
         Inventory   85


    If inventory has been tagged for disposition but not yet disposed of, the accounting staff should immediately create a reserve (contra account) for the total amount that is expected to be lost from the disposition of all the identified items. This would be a debit to the cost of goods sold expense and a credit to the reserve for obsolete inventory account. The reserve would appear on the balance sheet as an offset to the inventory line item. Then, as items are actually disposed of, the reserve would be debited and the inventory account credited. This approach immediately recognizes the full amount of the loss, even if the related inventory has not yet been disposed of.

    If you are aware of an inventory issue that requires a write-down, you should charge the entire amount to expense at once. You should not spread the write-down over future periods, because that would imply that some benefit is accruing to your company over the write-down period (see the matching principle), which is not the case.

    Related Topics

    How do I identify obsolete inventory?
    How do I report an inventory write down?
    Inventory internal controls
    Types of inventory errors
    What is inventory shrinkage?

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    Reader Comments (6)

    Do I show this inventory write down on a inventory card?

    March 28, 2012 | Unregistered CommenterRohini Nagar

    You would only write down the inventory on an inventory card if you are tracking inventory quantities manually, and you have actually eliminated the inventory from stock, so that the on-hand unit quantity is reduced. When you write down inventory in the financial records, it would be in the general ledger.

    March 29, 2012 | Unregistered CommenterSteve Bragg

    Thank you very much.

    March 29, 2012 | Unregistered CommenterRohini Nagar

    How would I show / enter this transaction on a inventory card?
    This particular business is using WAC method of inventory valuation. Original cost of product 3001 is $160.
    The stocktake noted that 2 units of product 3001 have been damaged and will be sold below cost. The 2 units are to be written down to $100 each excluding GST.

    April 2, 2012 | Unregistered CommenterRohini Nagar

    Hi, I have a question regarding a write down. I have a trial balance to make, and I need to write down €40 on inventory. The inventory account is there, as usual, so I credited it there. There is no certain account to debit it, no specific account made for the write down. Is there any other account where I can debit these €40?

    October 4, 2012 | Unregistered Commentertg

    You would offset the inventory reduction with a debit to the cost of goods sold account.

    October 5, 2012 | Unregistered CommenterSteven Bragg
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