How to write down inventory
/The write down of inventory involves charging a portion of the inventory asset to expense in the current period. Inventory is written down when goods are lost or stolen, or their value has declined. 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.
If inventory has been tagged for disposition but has not yet been 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 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.
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When to Write Down Inventory
If you are aware of an inventory issue that requires a write-down, charge the entire amount to expense at once. Do not spread the write-down over future periods, because that would imply that some benefit is accruing to the business over the write-down period, which is not the case.
Example of Writing Down Inventory
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:
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:
The Difference Between an Inventory Write-Down and a Write-Off
An inventory write-down occurs when a business reduces the recorded value of its inventory because it is no longer worth its original cost, typically due to damage, obsolescence, or market declines. The inventory still exists and may eventually be sold, but it is carried at a lower value on the balance sheet to reflect its reduced worth. In contrast, an inventory write-off completely removes inventory from the accounting records because it is deemed unsellable or unusable, such as when inventory is destroyed or lost. While a write-down is a partial adjustment that retains inventory at a lower value, a write-off is a full elimination of the inventory from the books.