A contra inventory account is a general ledger account that is paired with the inventory account, and which contains a negative balance that represents a reserve for obsolete or damaged goods. When offset against the related inventory account, the contra account results in a lower reported level of inventory on the financial statements.
A contra inventory account is especially useful in any of the following circumstances:
- Market prices are lower than inventory costs, which will trigger a lower than cost or market adjustment
- The inventory is quite old or turnover levels are low
- Some of the inventory is no longer listed in the bills of material for current products, and so will not be used