Inventory Write-Off

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Definition of 'Inventory Write-Off'

Inventory write-off is an accounting entry that removes the cost of inventory that is no longer available for sale. This can happen for a variety of reasons, such as when inventory is damaged, lost, or stolen.

There are two main types of inventory write-offs:

* **Normal** inventory write-offs are expected and occur as part of the normal course of business. For example, a grocery store may write off food that has gone bad.
* **Abnormal** inventory write-offs are unexpected and occur due to unusual circumstances. For example, a company may write off inventory that was destroyed in a fire.

Inventory write-offs can have a significant impact on a company's financial statements. They can reduce the company's net income and working capital, and they can also increase its taxes.

Companies must carefully consider the need for an inventory write-off before making the entry. They must also be sure to follow the correct accounting procedures for recording the write-off.

Here are the steps involved in recording an inventory write-off:

1. The company must determine the value of the inventory that is being written off. This can be done by using the cost of the inventory, the market value of the inventory, or a combination of the two.
2. The company must record a journal entry to remove the cost of the inventory from its books. This entry will debit the inventory account and credit either the cost of goods sold account or the loss on inventory account.
3. The company must also record a tax entry to reflect the impact of the write-off on its taxes. This entry will debit the income tax expense account and credit the income tax payable account.

Inventory write-offs can be a difficult and costly process, but they are sometimes necessary to ensure that a company's financial statements are accurate. By carefully following the correct accounting procedures, companies can minimize the impact of inventory write-offs on their financial results.

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