Obsolete inventory consists of products that a company can no longer sell due to various reasons, such as a product being out of style or containing old technology. When you recognize that some of your inventory has become obsolete, you must record a write-down in your accounting records to reflect the loss of value in your inventory. This reduces your inventory account, which is a balance sheet account, and creates a loss, which you report on your income statement similar to an expense.
Determine the cost you incurred to initially acquire or manufacture your obsolete inventory and the lower current market replacement cost, which is the price for which you could acquire or manufacture the products today. For example, assume the initial cost of your products was $5,000 and the market cost today is $3,000.
Subtract the lower market cost from your initial cost to determine the value of the write-down to record in your accounting journal. For example, subtract $3,000 from $5,000, which equals $2,000.
Write the date of your journal entry in the date column of your accounting journal. For example, if you are recording the journal entry on December 31, write “12-31” in the date column of your accounting journal.
Write “Loss on inventory write-down” in the accounts column on the first line of the journal entry and the amount of the write-down in the debit column on the same line. The amount in the debit column increases a loss account. For example, write “Loss on inventory write-down” in the accounts column and “$2,000” in the debit column.
Write “Inventory” with an indent in the accounts column on the second line of the entry and the amount of the write-down in the credit column on the same line. The amount in the credit column decreases your inventory account, which is an asset. For example, write “Inventory” in the accounts column and “$2,000” in the credit column.
Write a description of the journal entry in the accounts column on the third line of the entry. For example, write “Write-down of obsolete inventory” in the accounts column.