An inventory write off is the process of reducing the value of the inventory of a business to record the fact that the inventory has no value. The inventory write off can occur for a number of reasons such as loss from theft, deterioration, damage in transit, misplacement etc.
As an example, suppose a business has a product in inventory which cost 1,000, and has had to scrap the product due to its damaged condition.
In this case the business knows the value of the inventory is zero and throws it away. This is distinct from the situation where a business wants to make an allowance against the inventory value for an estimated reduction in value and writes down the value of the inventory.
Inventory Write Off Journal Entry
The value of the inventory has fallen by 1,000, and the reduction in value needs to be reflected in the accounting records.
The inventory write off journal entry is as follows:
|Loss on inventory write off||1,000|
The journal entry above shows the inventory write-off expense being debited to the Loss on inventory write off account. If the inventory write off is immaterial, then a business will often charge the inventory write off to the Cost of goods sold account. The problem with charging the amount to the cost of goods sold account is that it distorts the gross margin of the business, as there is no corresponding revenue entered for the sale of the product.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
In this case, the asset of inventory has been decreased by a 1,000 and an expense of 1,000 (loss on inventory write off account) is included in the income statement. The expense reduces the net income of the business which reduces the retained earnings and therefore the owners equity in the business.
A write off is similar to a write down, except that with a write down, the asset is still left with a book value whereas with a write off the value of the asset is reduced to zero.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.