How to Write Off Inventory
Writing off inventory involves recognizing that certain inventory items are obsolete, damaged, or otherwise unable to be sold, and removing their value from the inventory account on the company’s balance sheet.
Here’s a step-by-step process on how to write off inventory:
- Identify Obsolete Inventory: Review the inventory and identify any items that are obsolete, damaged, or otherwise unsalable.
- Determine the Write-off Amount: The write-off amount is the recorded cost of the inventory items being written off.
- Record the Write-off: The write-off is recorded as a debit (increase) to an expense account and a credit (decrease) to the inventory account. The expense account might be called “Loss on Inventory Write-offs” or “Inventory Write-off Expense.”
The journal entry for an inventory write-off is:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| mm/dd/yyyy | Inventory Write-off Expense | xxx | |
| Inventory | xxx |
- Report the Write-off: The write-off 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.
- Discard or Dispose of the Inventory: Depending on the nature of the inventory and the reason for the write-off, you might need to discard the inventory, sell it for salvage value, or dispose of it in a way that complies with any relevant regulations.
As always, when handling such matters, it’s important to consult with a qualified accountant or financial advisor.
Example of How to Write Off Inventory
Let’s say a company named “FoodCo” manufactures canned food. Due to a malfunction in the canning process, a whole batch of 1,000 cans has been improperly sealed and is unsalable. Each can originally cost $2 to produce, so the batch cost $2,000.
Here’s how FoodCo would write off this inventory:
- Identify Obsolete Inventory: FoodCo identifies the batch of 1,000 improperly sealed cans as unsalable.
- Determine the Write-off Amount: The write-off amount is $2,000, which is the cost of the unsalable cans.
- Record the Write-off: FoodCo makes the following journal entry to write off the inventory:
Date, Account Title, Debit ($), Credit ($)
06/23/2023, Inventory Write-off Expense, 2,000, Inventory2,000
This entry records a $2,000 inventory write-off expense, increasing FoodCo’s expenses for the period, and reduces inventory by $2,000, indicating that FoodCo has $2,000 less inventory available for sale. - Report the Write-off: The write-off will appear as a $2,000 expense on FoodCo’s income statement, reducing net income for the period. The write-off will also reduce inventory on FoodCo’s balance sheet by $2,000.
- Discard or Dispose of the Inventory: FoodCo will need to dispose of the improperly sealed cans, following any relevant health regulations and company policies.
As always, this is a simplified example and actual procedures may vary depending on the company’s specific circumstances and accounting policies. It’s important to consult with a qualified accountant or financial advisor for accurate information.
