This is especially frequent in industries like technology and retail where there are short life cycles for products. If a new model of a product comes out, consumer demand decreases, or market trends shift, and companies may be left holding inventory that is a fraction of its original value. Obsolescence tends to be a common reason why inventory might be written down. Inventory write-downs occur when the value of an inventory is diminished-which can happen for a multitude of reasons.
Instead, it would be treated as an inventory write-off. It should be noted though that if a piece of inventory loses all its value as opposed to just some, it would not be eligible for a write-down. Items affected by a range of different scenarios-like damage, theft and shifting market trends-are all subject to an inventory write-down if their actual worth drops below the book value. This includes the raw materials, in-progress products and finished merchandise. Inventory can be written down if the value is reduced. What Items are Eligible for a Write-Down? Companies can reduce incidents of inventory write-downs through effective inventory management strategies like avoiding excessive inventory, reviewing order frequency, tracking trends in demand and implementing precautionary measures to avoid theft or damage.An inventory write-down impacts both the income statement and the balance sheet-reducing net income, retained earnings and shareholder equity.Inventory often loses value because of obsolescence, theft, decrease in consumer demand, damage, spoilage, misplacement and shifts in the market.An inventory write-down differs from an inventory write-off because it deals with inventory losing some of its value, not all of its value.If inventory loses value, an accounting process called an inventory write-down is required to show on the financial statements that the net realizable value is less than anticipated.
The journal entry on the income statement would appear as such: The company only had a few of that particular model left. Now, let’s say the amount of the write-down is not significant. Because the cases in the inventory are becoming obsolete, they drop in value from $25 each to $10, a difference of $15 each. Case City’s current inventory of phone cases will not fit the new device. Inventory Write-Down Journal Entry ExampleĪs an example, online retailer Case City sells phone cases and a new version of the most popular cell phone brand has come out. Ultimately, an inventory write-down reduces the value of the ending inventory for the period, which has implications on both the income statement and balance sheet of a business. This ensures accounting accuracy and lessens tax liability. The adjustment must be made as soon as possible. When an inventory’s fair market value drops below its book value, a journal entry is made in the inventory write-down expense account or cost of goods sold (COGS) account depending on the significance of the write-down. Let’s answer the burning question here: what exactly is an inventory write-down? The term refers to a required accounting process that must be conducted when inventory decreases in value-but does not lose its value completely.
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Considering its implications, it’s valuable for companies to understand what it is, how to do it and inventory management techniques to reduce the need for write-downs. The write-down impacts the balance and income statement of a company-and ultimately affects the business’s net income and retained earnings. Factors like changing market conditions, obsolescence, damage, theft and other circumstances can cause its value to depreciate-which must be noted for accounting purposes.Īn inventory write-down is the required process used to reflect when an inventory loses value and its market value drops below its book value. Middle East, Nordics and Other Regions (opens in new tab).United States/Canada (opens in new tab).Advertising & Digital Marketing Agencies.Advertising and Digital Marketing Agencies.
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