Usually a loss is considered immaterial if it amounts to less than 5% of total inventory on hand. The inventory write-down process will debit the COGS and credit inventory. Only one freezer broke and it didn’t have much meat in it-the large majority of the inventory was unaffected. Let’s say the loss is considered insignificant, in this case $500. Because the meat has entirely lost value, it must be written off. Unfortunately, the freezer breaks down and the meat spoils, rendering it unsellable and unsalvageable. Inventory Write-Off ExampleĪ meat distributor has many expensive cuts of meat in the freezer. And the COGS is an accounting of all the indirect and direct costs that go into making a product. It’s especially useful when calculating your taxable income. Rather than simply change the original entry, it’s a cleaner way of showing the reduction in value and can be useful for tracking historical costs. A contra account is an entry on your general ledger that shows the original value and the new reduced value. When inventory value is totally eliminated, that loss is recorded in the contra account or cost of goods sold (COGS) accounting, depending on the significance of the write-off. If inventory loses all its value because it’s spoiled, damaged, obsolete or stolen, the accounting process required to reflect that loss is known as a write-off. What Is an Inventory Write-Off?įirst, what is inventory? Inventory is a company’s raw materials, component parts or finished product. However, some write-offs may be eligible for a tax deduction to alleviate the loss. Inventory is an asset, and write-offs impact your balance sheet and income statement, ultimately lowering the net income and retained earnings. When businesses experience these losses, writing it off correctly for accounting purposes can reduce their overall tax liability and help them stay compliant with regulations and best accounting practices. When it comes to inventory, events like spoilage, damage or obsolescence, along with theft and loss of market value can reduce or even eliminate its value. East, Nordics and Other Regions (opens in new tab)
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