For some companies, inventory is an important part of the accounting process because it represents a large portion of their assets. The original value of inventory may not remain constant, however, and companies can use inventory provisions to cover possible losses.
An inventory provision is typically a dollar figure companies write off for theft, spoilage, obsolete or damaged inventory. Companies use these provisions to ensure the inventory figures on the accounting books accurately reflect the physical inventory products in the company.
Inventory often ages and goes out of date if a company is unable to sell the products. For example, grocery stores may use provisions to account for products that go bad if not sold by a certain date. These provisions result in an expense and lower income.
Companies that consistently have large inventory provisions or inventory write offs may signal questionable inventory management practices to banks, lenders and investors. The inability to sell inventory and writing off inventory results in lower financial returns for business stakeholders.