If you don’t have frequently damaged inventory, you can choose to debit the cost of goods sold account and credit the inventory account to write off the loss. Debit the cost of goods sold (COGS) account and credit the inventory write-off expense account.Every time you make an entry in the inventory write-off expense account, you reduce the amount of inventory carried on the books. Set up an inventory write-off expense account to record the value of the damaged inventory.This amount may be lower than the original purchase price. The damaged stock is valued at fair market value, which is the current purchase price for the same inventory items.Calculate the value of the damaged inventory at the end of the accounting cycle to write-off the loss.Prepare a damage report for each damaged inventory item. Examine the stock when it arrives to identify goods that might have been damaged and place it in a designated area.While most businesses do an inventory write-off at the end of each year, if you have a large inventory, you should account for significant changes once every month. Items such as technology products with high market value can become obsolete after a few months.Damage due to inadequate storage and handling.Inventory, such as fruits and flowers, maybe spoilt due to their short shelf life.Inventory is stolen by shippers, shoplifters or employees.This could happen due to the following reasons: This is why it’s important for businesses to account for inventory write-off when the value of inventory changes significantly. The accurate value of inventory is crucial in calculating gross profit or loss. The problem with this is that it distorts the gross margin of the business, as there is no matching revenue entered for the sale of the product. If the inventory write-off is inconsequential, the inventory write-off is charged to the cost of goods sold account. The reduction in retained earnings, in turn, decreases the shareholders’ equity in the balance sheet.A reduction of the business’ net income and therefore, its retained earnings.The expense item, in any case, appears as an operating expense. Next, credit the inventory shrinkage expense account in the income statement to reflect the inventory loss. The value of inventory to be written off is:
If you decide to write-off $20,000 worth of inventory from the $80,000 worth of inventory that your business has at the end of the year, you must first credit the inventory account with the value of the write-off to reduce the balance. To write-off inventory, you must credit the inventory account and record a debit to the inventory. If specific inventory items have not been identified, businesses can set up a reserve for inventory write-offs. The amount to be written off is the cost of the inventory and the amount of cash that can be obtained by selling off or disposing of the inventory in the most optimal manner. When the inventory loses its value, the loss impacts the balance sheet and income statement of the business. If you need income tax advice please contact an accountant in your area. NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. How Does a Write-Off Affect the Income Statement?.It’s done by charging it to the cost of goods sold or by balancing the obsolete inventory allowance in the books. Inventory write-offs are done to support accounting accuracy objectives while also reducing the tax liability for business owners. The inventory may lose its value due to damage, deterioration, loss from theft, damage in transit, changes in market demands, misplacement etc. Inventory write-off refers to the accounting process of reducing the value of the inventory that has lost all of its value.
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