Inventory Write-off, Why?


An accounting term for the formal recognition that a portion of a company's inventory no longer has value. An inventory write-off may be handled in the company's books by charging it to the cost of goods sold or by offsetting the obsolete inventory allowance. Most inventory write-offs are small, annual expenses; a large inventory write-off, such as one caused by fire, may be categorized as a non-recurring loss. If inventory still has some value, it will be written down instead of written off. Other items that companies commonly write off include uncollectable accounts receivable and obsolete fixed assets.



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  Inventory Write-offs remove excess inventory from books but not shelves
  How do you report a write-down in inventory?
  Related Regulations
  Youngland Express Inventory Write-Down for Dynamics GP (Great Plains)

Inventory Write-offs remove excess inventory from books but not shelves

Many public or private businesses have been writing off millions or even billions of dollars worth of inventory, both parts and finished products, that has declined in value.

Although inventory write-offs reduce a company's net income, they can potentially boost profits later, if the company ends up using or selling the inventory it has written off. As a result, many analysts view them as neutral to positive.

Inventory Write-offs is raising two serious questions: Are they misleading investors? And are they really putting a dent in the monstrous glut of inventory that has been hanging over the industry?

Much of the inventory that has been written off companies' books is still sitting in their plants and warehouses, potentially competing with new full- price merchandise. Companies value inventory at cost, but when the market value of parts or finished goods falls below cost - because of damage, obsolescence or price changes - the company is required to take a write-off or "charge" for the difference.

If a company bought a part for $100 and that part is now worth $20, the company will take a $80 charge.

If the market value falls to zero, the charge is known as a write-off, while a write-down implies the inventory still has some value. But the terms are used interchangeably and companies often take a combination of both.

Definition of Inventory Write-Down

Refers to making an entry, usually at the close of a period, to decrease the cost value of the inventories asset account in order to recognize the lost value of products that cannot be sold at their normal markups or will be sold below cost. A business compares the recorded cost of products held in inventory against the sales value of the products. Based on the lower-of-cost-or-market rule, an entry is made to record the inventory write-down as an expense.

Companies usually include inventory write-offs in cost of goods sold, which reduces their operating earnings. Operating earnings refers to Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. It is the number many analysts use when valuing a company.

How do you report a write-down in inventory?

A write-down in a company’s inventory is recorded by reducing the amount reported as inventory. In other words, the asset account Inventory is reduced by a credit. The debit in the entry to write down inventory is reported in an account such as Loss on Write-Down of Inventory, an income statement account.

If the amount of the Loss on Write-Down of Inventory is relatively small, it can be reported as part of the cost of goods sold. If the amount of the Loss on Write-Down of Inventory is significant, it should be reported as a separate line on the income statement.

Since the amount of the write-down of inventory reduces net income, it will also reduce the amount reported as owner’s or stockholders’ equity. Hence for the balance sheet and in the accounting equation, the asset inventory is reduced and the owner’s or stockholders’ equity is reduced.


Pursuant to IRS Regulation 1.471-2(c) (If you are located in U.S.A.) inventoried goods that are unsaleable or unusable in a normal transaction because of wear and tear, obsolescence or broken lots, should be valued at bona fide selling prices less selling costs. In the case of unsaleable or unusable raw material or partly finished goods, an adjustment on a reasonable basis to the valuation of such inventory to not less then its scrap value is allowable.

Accordingly, if in your judgment the inventory meets the description above, you may write down its carrying value to actual value (using any reasonable method consistent with your industry practice) by debiting cost of goods sold and crediting your inventory account. This forces the write down through your income statement as an expense.

Be prepared to back up your write down with documentation and pictures.

Youngland Express Inventory Write-Down for Dynamics GP (Great Plains)

As you’ve realized that speed up process and accurately write-down inventory maybe the next operational step, but you can’t help to be concerned during the fiscal year end other important tasks? We’ve got a solution.

Youngland has developed a solution that provides seamless and easy to use experience on the fiscal year end day. It is a must-have for users of Microsoft Dynamics GP (Great Plains) who plan to write down (or write off) many inventory items or sku(s) in the distribution, retails and manufacturing businesses.

We are pleased to present Youngland's Express series, a productivity enhancement suite for Microsoft Dynamics GP (Great Plains) in Canada and USA. We are excited about this solution, and believe that with your experiences and talents in working with small to mid-market businesses, we’re a step further down the path of helping our customers to realize their full potentials.


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