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 in 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