Inventory write off journal entry
Overview
The company may write off some items in the inventory when it deems that they are no longer have value in the market or the business. In this case, the company needs to make the inventory write-off journal entry in order to remove the written-off items from the balance sheet.
The nature of the inventory is an asset, in which its normal balance is on the debit side. Likewise, writing off the inventory will decrease the total assets on the balance sheet, and at the same time, it increases total expenses on the income statement.
Inventory write off journal entry
The company can make the inventory write-off journal entry by debiting the loss on inventory write-off account and crediting the inventory account.
| Account | Debit | Credit |
|---|---|---|
| Loss on inventory write-off | 000 | |
| Inventory | 000 |
Loss on inventory write-off is an expense account on the income statement, in which its normal balance is on the debit side. Likewise, in this journal entry, the write-off expense will increase in the same amount of the inventory loss.
Inventory write off example
For example, on Mar 5, the company ABC makes the inventory write-off which amounts to $20,000 due to its no longer have value in the market.
In this case, the company ABC can make the journal entry for the inventory write-off by debiting 20,000 to the loss on inventory write-off account and crediting the same amount to the inventory account as below:
| Account | Debit | Credit |
|---|---|---|
| Loss on inventory write-off | 20,000 | |
| Inventory | 20,000 |
Likewise, in this journal entry, the company ABC’s total assets on the balance sheet are reduced by $20,000 while the expenses on the income statement increase by the same amount of $20,000 on March 5.
It is useful to note that, even writing off the inventory has a negative impact on the financial statements, the company should still write off those inventory items that no longer have value in the market. This is so that the company has the balance sheet that reflects the actual net realizable value and the income statement that has shows the actual performance during the accounting period.