An inventory write-off is the formal recognition of a portion of a company's inventory that no longer has value. Write-offs typically happen when inventory becomes obsolete, spoils, becomes damaged, or is stolen or lost.
What Is Obsolete Inventory? Obsolete inventory, also called “excess” or “dead” inventory, is stock a business doesn't believe it can use or sell due to a lack of demand. Inventory usually becomes obsolete after a certain amount of time passes and it reaches the end of its life cycle.
Obsolete Inventory In Accounting
In accounting, companies must treat obsolete inventory according to GAAP. The general rules require businesses to create an inventory reserve account dedicated to obsolete inventory in their balance sheets. The companies must also expense their obsolete inventory during its disposal.
The ability to take a tax deduction for obsolete inventory can only occur if the inventory is disposed of in 1 of 3 ways: 1. Selling it – This does not mean selling the inventory at a reduced price to your existing customer base. Rather, this is the sale of inventory to a place such as a liquidator or junkyard.
Obsolete inventory is written-down by debiting expenses and crediting a contra asset account, such as allowance for obsolete inventory. The contra asset account is netted against the full inventory asset account to arrive at the current market value or book value.
The best way to identify obsolete inventory is by implementing the right tools, technology, and processes to identify slow-moving inventory on hand. For instance, conducting regular inventory audits can quickly identify obsolete inventory before it eats away at your profits.
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.
On your balance sheet, debit cost of goods sold (COGS) and credit your inventory write-off expense account. If you're only writing off small amounts of inventory, you can also just debit your COGS account and credit your inventory account.
To measure obsolete inventory, you need to calculate the difference between the cost and market value of the inventory items or categories that are below the LCM rule. This difference is the amount of loss that you need to record in your income statement as an expense.
It can be referred to as deadstock (one word), dead inventory, excess stock or inventory, and obsolete stock or inventory.
What Is the Difference Between Dead Stock and Obsolete Stock? Dead stock refers to excess stock that isn't being used for extended periods of time whereas obsolete stock is inventory that can no longer be used.
Obsolete inventory examples
Here are some common examples of obsolete items: Outdated parts or components. Excess inventory from discontinued products. Unsellable dead stock due to a change in customer preferences.
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.
To deduct stock losses on your taxes, you'll need to fill out IRS Form 8949 and Schedule D. First, calculate your net short-term capital gain or loss by subtracting short-term losses from short-term gains. Then, calculate your net long-term capital gain or loss by subtracting long-term losses from long-term gains.
Sales Strategies For Quick Results. The most obvious way to clear out inventory is to discount old and excess stock. In order to create demand for these products, you'll need to discount your items heavily. Consider offering discounts between 35-70%.
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.
Dead stock, also known as obsolete stock and obsolete inventory, refers to items without demand for a sustained period. This is usually because sales have died out as items reach the end of their product life cycle or components are no longer used in their supply chain.
What do I do with obsolete inventory? 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.
'Inventory' refers to any asset that the company can either sell for revenue or convert into goods that can be sold for revenue. When these assets become obsolete, damaged, spoiled, lost, or stolen, the company must write them off.
Inventory may become obsolete over time, and so must be removed from the inventory records. Obsolescence is usually detected by a materials review board. This group reviews inventory usage reports or physically examines the inventory to determine which items should be disposed of.
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.
Bona fide sale: Written-off inventory can be sold to a salvage yard or liquidator and still be eligible for a tax deduction from the IRS. A company would then subtract the profit recovered from the inventory's original fair market value and could claim any remaining cost as a tax benefit.
To record a write-off, a company makes a debit entry in the inventory write-off expense account and a corresponding credit entry in the inventory account. This action removes the value of obsolete inventory from the company's assets, aligning inventory records with the actual market value.