Inventory Write-Off
Candlefocus EditorBusinesses typically receive inventory in the form of merchandise and supplies. This inventory can depreciate over time, become obsolete, spoil, become damaged, or get stolen or lost, resulting in financial losses. When inventory loss occurs, a company must decide if it will be written off or written down.
The direct write off method is a method for recording a complete, one-time loss of an inventory item. With this method, a company updates its account balances immediately by writing off the loss at the time it occurs. This method is considered more reliable than the allowance method and can also be easier to record since it requires fewer steps.
The allowance method is a method of recording partial or incremental inventory losses over time. This method is typically used when the inventory does not completely disappear, but instead has decreased in value. The allowance method requires businesses to track the inventory losses throughout a period and then allocate the losses to an allowance account. The decreases in inventory that are recorded as an allowance are called inventory write-downs, not write-offs.
Inventory write-offs are an important part of keeping accurate records of a company's inventory and associated losses. They also provide an important point of reference for companies when assessing the condition of their inventory on a quarterly or annual basis. When recognizing the loss of inventory, businesses must make sure to use the correct write off method which most appropriately recognizes their inventory losses.