How do you account for a loss in value of your Inventory items?

by Holman

Capital assets depreciate over time. What is the equivalent for inventory/stock?

Lets say you have 100 units and honestly expect to sell them all at the planned price. "Depreciation" is zero. But what if it is end-of-line time and the stock will only move at ever reducing prices and the final count will be pure scrap. What is right name for write-down which anticipates that "actual loss of value"... the equivalent to depreciation for capital assets?



Thanks for your question!

I think what you're referring to is Sales Discounts.

Normally in small business accounting we don't make automatic monthly entries to estimate Sales Discounts, like we do with Depreciation for Capital Assets. But I like that you're thinking along those lines.

You can account for loss of value of your Inventory a couple of ways, depending on your small business accounting system.

A very simplified system:

If you're purchasing products to sell, suppose you post the purchases to an expense account "Purchases". Then you can periodically take an actual inventory count, and then adjust your Inventory (asset) account and your Purchases (expense) account.

That way, if you had to sell off Inventory at a lower price than you paid for it, the difference will be reflected in your Profit or Loss on your Income Statement - as in a lower Sales amount and a higher Purchases (Cost of Sales) amount.


Computerized Accounting System

You may be using accounting software. And maybe you're assigning a value to each Inventory item, and moving those items out of Inventory with each Sale.

So you may purchase one "widget" at $2.00, planning on selling it at $4.00 and making a $2.00 profit. Let's say the "widget" is seasonal, and the season is past. You have to mark the "widget" down to $1.50 to sell it.

You move the "widget" out of inventory at $2.00, because it cost what it cost. But when you post your Sale, you post a Cash Receipt of $1.50, a Sales Discount of $2.50, and a Sale of $4.00.

There's different ways to do things in Accounting, depending on what type of system you're using.

I hope that helps.

If there are any more questions on Inventory or Sales, feel free to use my Contact Me page! or Ask the Expert!

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