The write down of inventory involves charging a portion of the inventory asset to expense in the current period. Inventory is written down when goods are lost or stolen, or their value has declined. This should be done at once, so that the financial statements immediately reflect the reduced value of the inventory. Otherwise, the inventory asset will be too high, and so is misleading to the readers of a company's financial statements.
If inventory has been tagged for disposition but has not yet been disposed of, the accounting staff should immediately create a reserve (contra account) for the total amount that is expected to be lost from the disposition of the identified items. This would be a debit to the cost of goods sold expense and a credit to the reserve for obsolete inventory account. The reserve would appear on the balance sheet as an offset to the inventory line item. Then, as items are actually disposed of, the reserve would be debited and the inventory account credited. This approach immediately recognizes the full amount of the loss, even if the related inventory has not yet been disposed of.
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When to Write Down Inventory
If you are aware of an inventory issue that requires a write-down, charge the entire amount to expense at once. Do not spread the write-down over future periods, because that would imply that some benefit is accruing to the business over the write-down period, which is not the case.
