what is an inventory write off 
an inventory write off is an accounting term for the formal recognition of a portion of a company s inventory that no longer has value an inventory write off can be recorded in two ways it can be expensed directly to the cost of goods sold cogs account or it can offset the inventory asset account in a contra asset account this is commonly referred to as the allowance for obsolete inventory or inventory reserve understanding inventory write offsinventory refers to assets owned by a business that can be sold for revenue or converted into goods that can be sold for revenue generally accepted accounting principles gaap require that any item that represents a future economic value to a company must be defined as an asset inventory meets the requirements of an asset so it s reported at cost on a company s balance sheet under the section for current assets 1inventory may become obsolete spoil become damaged or be stolen or lost in some cases a company must write off the inventory when these situations occur accounting for inventory write offsan inventory write off is the process of removing any inventory that has no value from the general ledger companies can use two methods to write off inventory the direct write off or the allowance method a business will record a credit to the inventory asset account and a debit to the expense account using the direct write off method 2say a company with 100 000 worth of inventory decides to write off 10 000 in inventory at the end of the year the firm will first credit the inventory account with the value of the write off to reduce the balance the value of the gross inventory will be reduced like this 100 000 10 000 90 000 the inventory write off expense account will then be increased with a debit to reflect the loss the expense account is reflected in the income statement it reduces the firm s net income and thus its retained earnings a decrease in retained earnings translates into a corresponding decrease in the shareholders equity section of the balance sheet a business will often charge the inventory write off to the cost of goods sold cogs account if the inventory write off is immaterial the problem with charging the amount to the cogs account is that it distorts the gross margin of the business because there s no corresponding revenue entered for the sale of the product most inventory write offs are small annual expenses a large inventory write off such as one caused by a warehouse fire may be categorized as a non recurring loss the other method for writing off inventory is known as the allowance method it may be more appropriate when inventory can be reasonably estimated to have lost value but the inventory hasn t yet been disposed of a business will record a journal entry with a credit to a contra asset account such as inventory reserve or the allowance for obsolete inventory an offsetting debit will be made to an expense account 2the inventory account will be credited and the inventory reserve account will be debited to reduce both when the asset is disposed of this is useful in preserving the historical cost in the original inventory account inventory write off vs write downit will be written down instead of written off if the inventory still has some fair market value but its fair market value is found to be less than its book value accounting rules require that a company must write down or reduce the reported value of inventory to the market value on the financial statement when the market price of the inventory falls below its cost the amount to be written down is the difference between the book value of the inventory and the amount of cash the business can obtain by disposing of the inventory in the most optimal manner write downs are reported in the same way as write offs but an inventory write down expense account is debited rather than an inventory write off expense account an inventory write off or write down should be recognized immediately the loss or reduction in value can t be spread and recognized over multiple periods because this would imply that there s some future benefit associated with the inventory item 