There are several ways to handle obsolete inventory. You can sell them at a discount, bundle them with other products, liquidate them through surplus resellers, try to remarket them to a different audience, or do a complete inventory write off.
When inventory items become obsolete, the reality is that their value is significantly lower than their cost. As a result, the U.S. accounting rules require that the cost of the obsolete inventory items be reduced to their net realizable value.
An inventory write-off can be recorded in two ways. It can be expensed directly to the cost of goods sold (COGS) account or it can offset the inventory asset account in a contra asset account. This is commonly referred to as the allowance for obsolete inventory or inventory reserve.
Liquidate excess stock
In cases where your business cannot find other uses for excess product, liquidation may be the best option. In this type of agreement, a liquidator will buy your excess stock at a negotiated price. It won't increase your profits, but it will deal with stock that is otherwise redundant.
GAAP requires that obsolete inventory be accounted for as soon as it's identified. This typically involves either writing down the inventory to its net realizable value or writing it off entirely if it has no value.
First, when inventory becomes obsolete, it must be written down or written off. This adjustment is recognized as a loss on the income statement, directly reducing net income. The write-down or write-off is recorded as an expense, meaning the loss is recognized in the current period.
When an organization has exhausted all other options, it must write-off obsolete inventory as a loss. Under Generally Accepted Accounting Principles (GAAP), it should list the obsolete inventory as an expense and use an inventory reserve account (a type of contra asset account) to offset the loss.
A write-down is a standard accounting obsolete inventory journal entry used to record the value of the old stock. This write-down is typically done when a company has certain products that are no longer useful and will not be sold.
An inventory write-off is the process of removing inventory items from your stock on hand list. This is done when items are no longer saleable due to being damaged, spoiled, stolen or becoming otherwise obsolete.
Dead stock inventory accounting is the process of identifying your obsolete inventory and the items that are no longer sellable. It can include damaged goods, leftover seasonal items, or expired raw materials. Dead stock in accounting tracks and records the cost of your unsold inventory.
In auditing inventory obsolescence and slow-moving items, I focus on evaluating the client's estimates of net realizable value and impairment losses. This involves comparing their assumptions with market data, historical trends, and industry benchmarks to ensure reasonableness.
The provision for obsolete inventory is based on the book value of the unsold inventory. You can find this amount by running an inventory aging report that identifies stock that has not been sold within a specific time.
The journal entry for an inventory write-off must “wipe out” the value of the inventory in need of adjustment with a coinciding entry to an expense account. If the write-off amount is immaterial and not a recurring event for the company, the cost of goods sold (COGS) account can be the expense account debited.
Dead stock, also known as dead inventory or obsolete inventory, refers to items that aren't expected to sell. Dead stock can negatively affect a business's bottom line. Don't confuse “dead stock” with “deadstock,” a niche term used by some consumers, such as sneaker enthusiasts.
In Quickbooks, multiple methods can be utilized to write off inventory, including First In, First Out (FIFO), Last In, First Out (LIFO), and the Average Cost Method. FIFO is based on the assumption that the oldest inventory items are sold first, followed by the newer ones.
Make a journal entry that credits the inventory asset account with the value of the write-off. Then, debit the inventory write-off expense account the same value. The change to the expense account reduces your company's net income on its income statement and decreases shareholder equity in the balance sheet.
An unfortunate effect of dead stock is that it will stay in the debit column of the balance sheet. This is unlike regular inventory, which turns over regularly and will leave the debit column when sold. Dead stock must be accounted in physical counts of inventory each month it sits until it is gone.
Allowance for obsolete inventory is a reserve contra asset account specifically created for inventory that loses value or will not sell. It reduces the net value of your inventory asset account on your balance sheet. It will hold the lost value of the obsolete part until the part is eventually disposed of.
GAAP requires that all obsolete inventory be written off at the time it's determined obsolete. Therefore, if a company is not regularly reviewing their inventory for obsolescence they could have a large hit to their bottom line.
Report losses due to worthless securities on Schedule D of Form 1040 and fill out Part I or Part II of Form 8949.
In that case, the recommended approach is to set up an adjustment category for damaged goods and add an inventory adjustment for the missing amount. This will decrease your stock on hand correctly and attribute the material cost of the damaged stock to your inventory adjustments record.