How to Account for Inventory Write-off
The value of a company's inventory can be a significant factor in calculating its gross profit or loss, so it is important that the value shown in the balance sheet is as accurate as possible. When stock becomes obsolete, damaged or is no longer available to use, you must adjust the balance on the inventory account. Some companies do this only once a year and estimate any changes in the monthly statements. Companies with a large inventory however should account for any significant adjustments each month.
Calculate the original cost of the inventory to be written off. You may find the information in the inventory or warehouse records or you may need to examine the original invoices.
Calculate the percentage of total inventory represented by the write-off value. For example, if the inventory balance is currently $100,000 and the value of the write-off is $4,000, divide $4,000 by $100,000 and multiply the result by 100 to obtain the percentage. The answer is 4 percent, which means that the write-off represents 4 percent of the current inventory value.
Credit the inventory account with the value of the write-off to reduce the balance. In this example, credit the inventory account with $4,000.
Debit either the cost of goods sold or the inventory write-off expense account with the loss. Use the inventory write-off account if the loss is a material percentage of the inventory. As a general guideline, writing off 5 percent or more of the inventory is a material adjustment. Debit the loss to cost of goods sold if its value is less than 5 percent of total inventory, as in the example.