Obsolete inventory, also called dead inventory, is automotive parts that are at the end of their life cycle. They have not been sold and they are not expected to sell for any substantial value, if anything at all, nor will they be installed in a car. Obsolescence is an especially difficult problem for modern automotive parts departments due to the speed of technological improvements. As a result, the life cycle of parts is becoming shorter, increasing obsolescence at a much faster rate. When to write down inventory A write-down is needed if the market value of your inventory part falls below the cost that has been reported in your records. To write down a part, you must make the following journal entry Account Debit Credit Inventory Obsolescence $XXXX Allowance for Obsolete Inventory $XXXX Allowance for obsolete inventory is a reserve contra asset account specifically created for inventory that loses value or will not sell. It reduces the net value of your inventory asset account on your balance sheet. It will hold the lost value of the obsolete part until the part is eventually disposed of.
Inventory obsolescence is an expense account that is created to show the lost value as an expense to your company and will reduce net income. If the write-down is small, some businesses will simply write it down using COGS.
For example, if you only had $300 to write down, you could make the following entry:
Account | Debit | Credit |
Inventory Obsolescence | $XXX | |
Allowance for Obsolete Inventory | $XXX |
Example of a write-down
You do a review of your inventory and determine there is $10,000 worth of obsolete inventory.
You do some research and determine that the inventory still has some value and can be sold for $1,000. The remaining balance of $9,000 ($10,000 - $1,000) needs to be written down.
Account | Debit | Credit |
Inventory Obsolescence | $9,000 | |
Allowance for Obsolete Inventory | $9,000 |
If you are lucky, you may be able to find an alternative way to offload the part. Perhaps you found another dealership that is in need of the part for a repair.
If this happens you will make the following journal entry:
Account | Debit | Credit |
Cash | $1,000 | |
Allowance for Obsolete Inventory | $9,000 | |
Inventory | $10,000 |
If you sell the parts for less than the market value (let’s say $600), such as selling the part at auction, at a discount to a shop that services old cars or for scrap. If this happens, you will want to use the following entry:
Account | Debit | Credit |
Cash | $600 | |
Allowance for Obsolete Inventory | $9,000 | |
COGS (or Inventory Obsolescence) | $400 | |
Inventory | $10,000 |
When to write off inventory
A write-off is necessary when you must take the part off of your books completely. This is when it has no value and cannot be sold.
Example of a write off
If you previously wrote down your parts and must throw out the parts because you couldn’t find a buyer, you would make the following entry once the part is disposed of:
Account | Debit | Credit |
Allowance for Obsolete Inventory | $9,000 | |
Inventory Obsolescence | $1,000 | |
Inventory | $10,000 |
NOTE: The above example uses the original write-down example from the above section.
To write off obsolete inventory you disposed of that was not previously written down, you will use the following entry (i.e. $10,000 in obsolete inventory was never written down and has $0 market value):
Account | Debit | Credit |
Inventory Obsolescence | $10,000 | |
Inventory | $10,000 |
For help finding ways to offload obsolete parts and reduce obsolescence, please contact Pro Count West today. Our team of automotive inventory experts would love to help.
