![]() A large inventory write-off (such as one caused by a warehouse fire) may be categorized as a non-recurring loss. Most inventory write-offs are small, annual expenses. The problem with charging the amount to the COGS account is that it distorts the gross margin of the business, as there is no corresponding revenue entered for the sale of the product. If the inventory write-off is immaterial, a business will often charge the inventory write-off to the cost of goods sold (COGS) account. A decrease in retained earnings translates into a corresponding decrease in the shareholders’ equity section of the balance sheet. The expense account is reflected in the income statement, reducing the firm’s net income and thus its retained earnings. Next, the inventory write-off expense account will be increased with a debit to reflect the loss. The value of the gross inventory will be reduced as such: $100,000 - $10,000 = $90,000. ![]() First, the firm will credit the inventory account with the value of the write-off to reduce the balance. For example, say a company with $100,000 worth of inventory decides to write off $10,000 in inventory at the end of the year. Using the direct write-off method, a business will record a credit to the inventory asset account and a debit to the expense account. There are two methods companies can use to write off inventory: the direct write-off, and the allowance method. Accounting for Inventory Write-OffĪn inventory write-off is a process of removing from the general ledger any inventory that has no value. When these situations occur, a company must write off the inventory. In some cases, inventory may become obsolete, spoil, become damaged, or be stolen or lost. Since inventory meets the requirements of an asset, it is reported at cost on a company’s balance sheet under the section for current assets. ![]() Generally accepted accounting principles (GAAP) require that any item that represents a future economic value to a company be defined as an asset. Inventory refers to assets owned by a business to be sold for revenue or converted into goods to be sold for revenue. When the market price of the inventory falls below its cost, accounting rules require that a company write down or reduce the reported value of the inventory on the financial statement to the market value. The other method for writing off inventory, known as the allowance method, may be more appropriate when inventory can be reasonably estimated to have lost value, but the inventory has not yet been disposed of. Write-downs are reported in the same way as write-offs, but instead of debiting an inventory write-off expense account, an inventory write-down expense account is debited. ![]() It may be expensed directly to the cost of goods sold (COGS) account, or it may offset the inventory asset account in a contra asset account, commonly referred to as the allowance for obsolete inventory or inventory reserve. All topics ▶ Business ▶ Corporate Finance and Accounting ▶ AccountingĪn inventory write-off is an accounting term for the formal recognition of a portion of a company's inventory that no longer has value. ![]()
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