Journal entry to write off damaged inventory

Introduction

Sometimes, we may need to write off the damaged inventory goods that can no longer be sold to the customer. In this case, we need to make the journal entry of writing off the damaged inventory in order to remove the damaged inventory from the balance sheet as well as to record the loss to the income statement.

However, sometimes, the damaged inventory goods still have some value in the market and we can sell them for a fraction of their total cost. In this case, we usually don’t need to write them off from the balance sheet. Instead, we just need to write down the value to their fair value.

In accounting, writing off the damaged inventory goods that no longer have value in the market is usually required, especially if the damaged inventory goods that need to be written off are significant or material to the financial statements. This is because if the writing-off activity is not done in this case, the total cost of the inventory on the balance sheet will not appropriately reflect their net realizable value.

Specifically, the total assets on the balance sheet will be overstated while total expenses on the income statement will be understated if we do not write off the damaged inventory goods that have zero value on the market. This applies the same to the damaged inventory goods that still have some value on the market, but their value has been reduced significantly due to their damaged state.

Journal entry to write off damaged inventory

We can make the journal entry to write off the damaged inventory by debiting the written-off amount to the loss on inventory write-off account and crediting the same amount to the inventory account in order to remove it from the balance sheet.

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

The loss on inventory write-off account is an expense item on the income statement. Likewise, this journal entry will increase the total expenses on the income statement as a result of writing off the damaged inventory. At the same time, this journal entry will decrease total assets on the balance sheet as the result of removing the damaged inventory from the balance sheet.

Example of writing off damaged inventory

For example, on December 31, we decide to write off $10,000 of the damaged inventory goods as they cannot be sold out anymore due to their damaged state. The $10,000 is the original cost of the damaged inventory goods that we have recorded on the balance sheet.

In this case, we can make the journal entry to write off the $10,000 of the damaged inventory by debiting this amount as the loss on inventory write-off and crediting the same amount to the inventory account as below:

Account	Debit	Credit
Loss on inventory write-off	10,000
Inventory		10,000

This journal entry is made to remove the $10,000 of the damaged inventory from the balance sheet. Likewise, this journal entry of writing off the damaged inventory will increase the total expenses on the income statement by $10,000 while decreasing the total assets by the same amount.

Write down the damaged inventory

As mentioned, if the damaged inventory goods still have some value, we can write down their value to the fair value instead of writing them off completely. In this case, the amount that is charged to the income statement as an expense is only the reduced amount of the inventory. And inventory goods are still kept on the balance sheet; though their value will be reduced to the fair value at its damaged state in order to have a fair presentation of net realizable value on the balance sheet.

Likewise, we can make the journal entry for writing down the damaged inventory by debiting the inventory write-down as an expense and crediting the inventory account for the written down amount.

Significant amount of write down:

Account	Debit	Credit
Inventory write-down	$$$
Inventory		$$$

Alternatively, if the written down value is just a small and is immaterial to financial statements, we can directly debit it to the cost of goods sold instead as below:

Insignificant amount of write down:

Account	Debit	Credit
Cost of goods sold	$$$
Inventory		$$$

For example, assuming the $10,000 damaged inventory in the example above still have some value, in which they can be sold to the customer for a fraction of the price. And, we decide to just write down their value instead of writing them off completely.

Also, we can reasonably estimate that these damaged inventory goods have a fair value of $2,000 which is the amount that we expected to receive from selling them to the customer (after deducting any necessary costs for the sale transaction to occur).

In this case, we can make the journal entry to write down the damaged inventory by debiting the written down amount of $8,000 ($10,000 – $2,000) to the inventory write-down account and crediting this same amount to the inventory account as fellow:

Account	Debit	Credit
Inventory write-down	8,000
Inventory		8,000