How to report an inventory write down
/Inventory is written down when its net realizable value is less than its cost. There are two aspects to writing down inventory, which are the journal entry used to record it, and the disclosure of this information in the financial statements.
Accounting for an Inventory Write Down
The journal entry for an inventory write down can be handled in two ways, which are as follows:
If you are using a periodic inventory system in which there is not an inventory record for each individual item in stock, then credit the inventory asset account by the amount to be written down, and debit a loss on write down of inventory account (which is an expense that appears in the income statement).
If you are using a perpetual inventory system in which there is an inventory record for each individual item in stock, then create a transaction in the inventory system which lists the inventory reduction as a write down, and the software will create the entry for you (which will still be a credit to the inventory asset account and a debit to the loss on write down of inventory account).
A sample of the journal entry used for this transaction is noted next. In the entry, we assume that $500 of finished goods inventory is being written down.
The level of disclosure of an inventory write down depends upon the size of the write down. In most cases, this is quite a small amount (since the bulk of write down events involve inventory being declared obsolete, usually in small increments), so you can charge the expense to the cost of goods sold account, and no further disclosure is required.
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However, if the amount of the write down is quite large, then charge the expense to a separate account that is also separately itemized on the income statement, so that readers can clearly see it. If you were to bury a large write down within the cost of goods sold expense, it would cause a large decline in the gross profit ratio that would have to be explained anyways.
Disclosure of an Inventory Write Down
Under International Financial Reporting Standards, you should disclose the amount of any write down of inventory recognized as an expense during the period. There is no specific requirement under Generally Accepted Accounting Principles to disclose the amount of a write down, but it does state that, when there is a substantial and unusual loss resulting from use of the lower of cost or market rule, it is desirable to disclose the amount of the loss in the income statement as a charge separately identified from the normal cost of goods sold.