Inventory write down journal entry

Overview

Sometimes, the value of inventory will drop significantly due to physical deterioration, obsolescence, or decline in the market price, etc. Likewise, if this happens, the company will need to make the inventory write-down journal entry to reduce the value of the inventory to its net realizable value.

The inventory write-down follows the concept of lower of cost or net realizable value which is the conservatism concept of accounting. In this case, as the inventory is initially measured at cost, if its net realizable value is lower than the cost later, the loss will occur and the value of inventory should be written down accordingly.

Inventory write down journal entry

The company can make the inventory write-down journal entry by debiting the loss on inventory write-down account and crediting the inventory account.

Account	Debit	Credit
Loss on inventory write-down	$$$
Inventory		$$$

Loss on inventory write-down is an expense account on the income statement in which its normal balance is on the debit side. Likewise, in this journal entry, total assets on the balance sheet decrease while total expenses on the income statement increase by the amount of loss in the inventory write-down.

Inventory write down example

For example, on December 31, due to obsolescence, one of the inventory items loss its value significantly. Its net realizable value is reduced to $10 per unit while its original cost was $15 per unit previously.

Due to this, the company ABC’s inventory is worth $100,000 less than its original cost. Hence, the company ABC decides to write down the value of its inventory to comply with the acceptable accounting standard.

In this case, the company ABC can make the inventory write-down journal entry by debiting the $100,000 into the loss on inventory write-down account and crediting the same amount in the inventory account to reduce its balance as below.

Account	Debit	Credit
Loss on inventory write-down	100,000
Inventory		100,000

After this journal entry, the value of inventory on the balance sheet reduces by $100,000 while the total expenses on the income statement increase by $100,000 due to the loss on the inventory write-down in the period.