Inventory Write Off

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:

Inventory Write Off Journal Entry
Account Debit Credit
Loss on inventory write off 1,000
Inventory 1,000
Total 1,000 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.

Inventory Write Down – Accounting Equation
Assets = Liabilities + Owners Equity
Inventory = None + Retained earnings
– 1,000 = 0 + – 1,000

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.

Popular Examples

Another example for you to discover.

Inventory Write Off November 6th, 2016Team

You May Also Like

Related pages

receivables turnover ratio industry averagemarketable securities accountingformula for discount rate in excelcalculate asset turnoverwhat is the formula for calculating gross profitlifo reserve calculationis dividends payable a current liabilitythe contribution margin income statementsingle step or multi step income statementsales mix examplereceivable turnover days formuladirect material formulaunearned income in balance sheetfixed assets turnover ratio calculatorsample voucher for paymentleverage gearing ratioaccounts receivable internal control checklistaccounts receivable credit or debitcash turnover ratio formulasingle entry bookkeeping definitionmarketable securities accountingaccounting for prepaymentssmall business general ledgeraccrual bookingfifo and lifo in accountingexample of stockholders equityjournal entry for creating provision for doubtful debtsexample of closing entriesaccounting for unrealized gains and losses on investmentshow to calculate carrying value of a bondfv formula in excelretain earningaccounting quizzaccounting concepts and principlesvariable cost of goods sold formulachange in nwcbookkeeping formulapurchases returns and allowancesinventory turnover days formulahow to calculate dividends with retained earnings and net incomegoodwill journal entryannuity present value factorformula for bepfuture value of an annuitycompounded continuously interest formulaadjusting entry examplespayroll journal templatebookkeeping equationexcel formula to calculate discount percentageexcel ledger templatereceivables control accountprofit sharing ratio formuladepreciation calculator straight line methodnormal balance of accounts receivablehow to calculate the contribution margin ratiooutstanding cheques in bank reconciliationaccounts receivables factoringwhat is weighted average contribution marginannuity payments formulaaccrued interest equationformula to calculate pvhow to compute total manufacturing costexpense payable journal entrydouble entry bookkeeping principlessingle entry ledger examplewhat is a current liabilities examplesfixed assets turnoverunearned income balance sheetroyalty accounting entriesdeferred tax double entrystraight line method depreciation exampleunpresented cheques definitionbalance sheet exercises with answersliquidation journal entriessap joint venture accountingdouble entry depreciationmeaning of imprest systemannuity examplescompound interest and simple interest formulas