When writing down inventory, you should charge a particular amount of your business inventory assets to expense in the current accounting period. This process is necessary when the products are lost, or their value has decreased.
Where necessary, you should write down the inventory before you prepare your business financial statement for the changes made on inventory to reflect in the financial statements. Otherwise, the value of inventory appearing in your business financial statement will be higher than the real value. This means that your financial statements will offer misleading information about your company’s financial status.
For example, if you purchased a widget at S$120 and you can only sell it for S$40 to a scrap hauler, then you should decrease the widget’s value by S$80. This is the value that is supposed to appear in your financial statements.
Methods of writing down inventory
There are two methods of writing down inventory. If you realize that the write-down amount isn’t significant, debit the cost of goods sold account and credit the same amount to the inventory account as shown below.
Debit Cost of goods sold S$100
Credit Inventory S$100
If the inventory write-down amount is significant, then, you should record the expense separately for you to track the write-down aggregate size. In this case, you will debit the inventory write-downs account and credit the inventory account as shown below.
Debit Inventory write-downs S$10,000
Credit Inventory S$10,000
In a case where you have tagged the inventory for disposition and you haven’t disposed of it yet, then, you should create a contra account for the total amount that is anticipated to be a loss from the disposal of the identified item.
This means that you will debit the cost of goods sold expense account and debit the contra account for obsolete inventory account. When preparing a balance sheet, this contra account will appear as an offset to the inventory item that was disposed of. When you later dispose of the item, you will debit the contra account and then credit the inventory account.
Whenever you realize that your inventory items require a write-down, you should immediately charge the amount to expense. This write-down amount must not be spread over future accounting periods as this would mean that your business is getting benefits due to the write-down amount which is not true. Remember, your business accounting processes must be carried out according to the matching accounting principle.
If you find these to be too complicated for you, you can consider getting a bookkeeping service in Singapore so to let the experts manage for you.