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How to Write Off Inventory (Comprehensive 2024 Guide)

2 minutes

In this article, we explain how to write off inventory and when to do it. We provide simplified instructions along with examples on how to do it properly. Read on to learn more.

how to write off inventory

5-Step Guide on How to Write Off Inventory

Writing off inventory involves adjusting a company's books to reflect items that can no longer be sold. Here's our simple guide to help you navigate this process:

Step 1: Identify Obsolete or Damaged Inventory

Regularly assess your inventory through physical counts and system reviews to identify items that have become obsolete or have suffered damage. Ensure that this assessment is periodic to stay updated.

Example: TechCo. finds 50 units of a discontinued model of headphones.

Step 2: Determine the Cost of the Identified Inventory

Once the unsellable inventory items are identified, pull out their original purchase or manufacturing cost from the accounting records. This ensures that the right value is written off.

Example: Gadgets Inc. identifies that their unsellable smartwatches were originally purchased for $80 each.

Step 3: Make the Inventory Write-Off Journal Entry

With the cost determined, adjust your financial records. This typically means crediting the "Inventory" account and debiting a "Loss on Inventory Write-Off" account.

Example: FashionHub, after a style trend change, credits their "Inventory" account and debits a "Loss on Inventory Write-Off" account by $3,000.

Step 4: Dispose of the Written-Off Inventory

It's crucial to decide on the method of disposal once the inventory is written off. They can be recycled, donated, or in certain cases, discarded responsibly to ensure environmental safety.

Example: GreenFoods decides to compost 400 lbs of perishable items that went unsold.

Step 5: Document and Review

Keeping meticulous records is key. Note down details about the written-off items, the reason for the write-off, the method of disposal, and any financial implications. 

Example: AutoParts Ltd. archives the details of 30 written-off engine components for audit purposes.

how to write off damaged inventory

When to Do an Inventory Write Off

Writing off inventory is a necessary action in specific scenarios to maintain accurate financial records. These can include:

Obsolete Inventory: Products that are out-of-date or have become technologically irrelevant.

Damaged Goods: Inventory items that are broken or impaired in such a way they can't be sold.

Lost Inventory: Items missing from stock, possibly due to theft or misplacement.

Excess Stock: Inventory that exceeds what can be sold or used within a reasonable time frame.

Unsellable Returns: Items returned by customers that can't be resold due to their condition.

how to write-off damaged inventory

How to Write Off Damaged Inventory: Case Study

XYZ Corp. is a leading electronic manufacturer. Due to an unfortunate warehouse flood, they need to write off a portion of their stock.

Here’s how they followed our process:

Step 1: Identify Obsolete or Damaged Inventory

After assessing the aftermath, XYZ Corp. pinpoints 200 units of Electronic Gadget Y as damaged, rendering them unsellable.

Step 2: Determine the Cost of the Identified Inventory

XYZ Corp. retrieves the original purchase records of the damaged goods. Their records show that each Electronic Gadget Y was acquired at a cost of $100, culminating in a total potential loss of $20,000.

Step 3: Make the Inventory Write-Off Journal Entry

XYZ Corp. adjusts their financial statements accordingly. They make a journal entry where they debit the "Loss on Inventory Write-Off" account and credit their "Inventory" account by $20,000.

Step 4: Dispose of the Written-Off Inventory

XYZ Corp. decides to collaborate with an electronics recycling firm to ensure the damaged gadgets are processed responsibly, minimizing environmental impact.

Step 5: Document and Review

XYZ Corp. files a detailed report of the event and the write-off process, which will later be reviewed by their finance team.

Writing off inventory ensures that a company's financial records accurately reflect its actual assets. We hope this article has provided you with clear insights into how to write off inventory effectively and accurately.

If you enjoyed this article, you might also like our article on what inventory write down is or our article on what inventory valuation is.

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