Accounting Methods for Obsolete Inventory by GAAP

It can be difficult to predict when certain products will become obsolete, but it is crucial to keep track of trends in the industry and be prepared for such a situation. If your company manufactures products that are no longer legal or compliant with the law, it will be challenging to sell them. Competitors don’t always need to advance the technology to make your product obsolete. A new brand with a better price or better marketing may be enough to disrupt your market. With so many options for consumers, it’s easy for them to shift away from your product, even if it still meets their needs.

Companies that don’t want to admit to such problems may resort to dishonest techniques to reduce the apparent size of the obsolete or unusable inventory. By staying up-to-date on changing consumer preferences and market trends, businesses can adjust their production levels and inventory orders to match anticipated demand. Lean manufacturing is a systematic approach to minimizing waste and maximizing efficiency obsolete inventory accounting in production processes. By optimizing production processes and reducing waste, businesses can improve their flexibility and responsiveness to changes in demand, reducing the risk of overproduction and excess inventory. Liquidation involves selling excess or obsolete inventory to third-party buyers at a discounted price in order to recover some of the initial investment and free up valuable warehouse space.

Causes of obsolete inventory

Though there are several great inventory forecasting solutions on the market, you can always rely on a 3PL to provide the insights you need to better forecast demand without the extra cost. If the products still have potential, you could also sell them at a discount by running a promotion, such as a flash sale. Known as obsolete inventory, holding on to purchased inventory that is no longer sellable can significantly harm your bottom line. IAS 2 Inventories contains the requirements on how to account for most types of inventory.

• By keeping up with market trends, businesses can adjust their production levels and inventory orders to match anticipated demand, reducing the risk of overproduction and excess inventory.
• As such, they might predict a much higher demand and end up ordering an excess amount of inventory.
• By staying ahead of shifts in the market, businesses can avoid accumulating obsolete inventory and maintain a strong position in their industry.
• Obsolete inventory ties up a company’s capital and takes up valuable storage space, and it can be difficult to sell or dispose of.
• This allows you to identify which products are becoming obsolete and take steps to prevent them from clogging up your warehouse space.
• Since you cannot sell obsolete inventory, it is considered a loss and can cut into profit margins.

Write-downs are reported in the same way as write-offs, but instead of debiting an inventory write-off expense account, an inventory write-down expense account is debited. If the inventory still has some fair market value, but its fair market value is found to be less than its book value, it will be written down instead of written off. When the market price of the inventory falls below its cost, accounting rules require that a company write down or reduce the reported value of the inventory on the financial statement to the market value.

Write-off Obsolete Inventory

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. Companies report inventory obsolescence by debiting an expense account and crediting a contra asset account.