How to Account for Inventory Write Off

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Inventory management is often one of the most time-intensive processes in a business. Accountants spend copious time with other parties in the company to accurately record and report inventory. Companies that experience low inventory turnover will need to write off damaged or obsolete inventory. Accountants typically complete this write-off on a quarterly basis. More frequent write-offs may be necessary depending on the company’s operating industry or inventory process, however. Two basic entries are possible when writing off inventory.

Review inventory cost reports from the operations department. Note the quantity and dollar amounts listed for damaged or obsolete inventory.

Multiply the quantity for each inventory item listed on the report by its respective cost amount. Total all calculated costs to determine the total inventory write-off amount.

Debit cost of goods sold and credit inventory if the inventory write-off amount is immaterial. Amounts less than 5 percent of total inventory on hand are generally immaterial in accounting terms.

Record large inventory write-offs by debiting a loss on inventory write-off account. This account goes against the company’s net income, reducing it for the period of the inventory write-off.

Tips & Warnings

  • Proper documentation is necessary to account for inventory write-offs. Operations documents, computational worksheets and authorized signatures are all common for these accounting entries.

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References

  • "Intermediate Accounting"; David Spiceland, et al.; 2007
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