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?

Comments

[Rohini Nagar]

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

[Steve Bragg]

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.

[Rohini Nagar]

Thank you very much.

[Rohini 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.

[tg]

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?

[Steven Bragg]

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