How to Report an Inventory Write-Down
An inventory write-down occurs when the market value of inventory falls below the cost that is recorded on the books, due to factors such as obsolescence, damage, or changes in market demand. The business then needs to “write down” the value of the inventory on its balance sheet to reflect this lower market value.
Here’s how to report an inventory write-down:
- Determine the Market Value of Inventory: The first step is to determine the new, lower market value of the inventory. This might involve estimating the selling price of the items, taking into account their condition and the current market conditions.
- Record the Write-Down : Once you’ve determined the market value, you’ll need to record the write-down. You do this by debiting (increasing) a loss account (such as “Loss on Inventory Write-Down” or “Cost of Goods Sold”) and crediting (decreasing) the Inventory account. The amount of the write-down will be the difference between the book value and the new lower market value of the inventory.
Example of How to Report an Inventory Write-Down
Suppose you have a clothing store and you purchased a line of designer jeans for $30,000. However, they haven’t sold as well as expected, and the fashion season is ending. You have $10,000 worth of these jeans left in inventory at their original cost, but you’ve determined that their market value is now only $6,000.
To accurately reflect this loss in value on your financial statements, you’ll need to write down the value of the inventory. Here’s how that might look:
|June 1, 2023
|Loss on Inventory Write-Down
In this entry, the Loss on Inventory Write-Down account is debited (increased) by $4,000 to record the loss in value. The Inventory account is credited (decreased) by the same amount to reduce the recorded cost of the inventory.
In the notes to your financial statements, you should explain that the write-down was due to the inventory’s reduced market value at the end of the fashion season. You might also discuss any steps you’re taking to avoid similar write-downs in the future, such as more careful purchasing or efforts to sell off inventory more quickly.
Again, remember that inventory write-downs can have significant tax and financial reporting implications, so it’s a good idea to consult with a financial advisor or accountant to ensure you’re handling them correctly.