How to Write Down Inventory
Writing down inventory involves recording a reduction in the recorded cost of inventory. This occurs when the inventory’s market value falls below its recorded cost. The process is used to prevent the inventory asset from being overstated on the financial statements.
Here are the steps to write down inventory:
- Identify the Need for a Write-down: This typically involves comparing the cost of the inventory to its market value. If the cost is greater than the market value, a write-down may be necessary.
- Determine the Write-down Amount: The write-down amount is the difference between the inventory’s recorded cost and its market value.
- Record the Write-down: The write-down is recorded as an increase (debit) to a loss or expense account and a decrease (credit) to the inventory account. The expense or loss account might be called “Loss on Write-down of Inventory” or “Inventory Write-down Expense.
The journal entry for an inventory write-down is:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| mm/dd/yyyy | Inventory Write-down Expense | xxx | |
| Inventory | xxx |
- Report the Write-down: The write-down will be reflected in the income statement as an expense, reducing the net income for the period. It will also reduce the value of inventory reported on the balance sheet.
Remember that the specific accounts used, and the process for identifying and measuring write-downs, can vary depending on the accounting policies and standards used by the company (e.g., GAAP or IFRS). Always consult with a qualified accountant or financial advisor if you are unsure.
Example of How to Write Down Inventory
Let’s say a clothing retailer initially purchased a line of dresses at $50 per dress and they have 100 dresses in stock. This makes their inventory cost $5,000 ($50 x 100). However, due to changes in fashion trends, the dresses have not sold well and their current market value has fallen to $30 per dress.
Given the decrease in market value, the company needs to write down the inventory.
- Determine the Write-down Amount: The market value of the dresses is now $3,000 ($30 x 100). So, the write-down amount is $2,000 ($5,000 cost – $3,000 market value).
- Record the Write-down: The write-down is recorded as follows:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 06/23/2023 | Inventory Write-down Expense | 2,000 | |
| Inventory | 2,000 |
This entry increases the “Inventory Write-down Expense” by $2,000, which will decrease the company’s net income for the period. The entry also decreases the “Inventory” account by $2,000, reflecting the reduced value of the dresses.
This inventory write-down needs to be taken into consideration when preparing the financial statements. The new balance of the inventory will be $3,000, and the $2,000 write-down expense will appear on the income statement, reducing the net income.
Remember, this is just an example and the specific accounts and processes can vary depending on the company’s accounting policies and standards (such as GAAP or IFRS).
