when an expense account is debited this identifies that the money spent on the inventory now obsolete is an expense a contra asset account is reported on the balance sheet immediately below the asset account to which it relates and it reduces the net reported value of the asset account 
examples of expense accounts include cost of goods sold inventory obsolescence accounts and loss on inventory write down a contra asset account may include an allowance for obsolete inventory and an obsolete inventory reserve when the inventory write down is small companies typically charge the cost of goods sold account however when the write down is large it is better to charge the expense to an alternate account financial statement impacts of obsolete inventorysome of this has been discussed in the prior section still let s dig into the specific financial statement implications of booking the entries discussed above and in more depth below first when inventory becomes obsolete it must be written down or written off this adjustment is recognized as a loss on the income statement directly reducing net income the write down or write off is recorded as an expense meaning the loss is recognized in the current period second the balance sheet is affected as the value of inventory under current assets decreases the write down reduces the carrying amount of inventory to its net realizable value which impacts the total asset value reported this reduction in assets can affect various financial ratios such as the current ratio and inventory turnover ratio this can be really important to companies that must meet debt covenants or other reporting metrics for obligations the decline in inventory value also reduces the overall book value of the company third the impact extends to the statement of cash flows specifically in the operating activities section while the write down of inventory does not directly affect cash flow the reduced net income decreases the cash generated from operations when using the indirect method plus if the company decides to dispose of the obsolete inventory at a lower price any cash received will be less than originally anticipated further affecting cash flows from operating activities example of obsolete inventoryfor example a company identifies 8 000 worth of obsolete inventory it then estimates that the inventory can still be sold in the market for 1 500 and proceeds to write down the inventory value since the value of inventory has fallen from 8 000 to 1 500 the difference represents the reduction in value that needs to be reported in the accounting journal that is 8 000 1 500 6 500 accountdebitcreditinventory obsolescence 6 500