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If it then sells, you debit $10 to Inventory Reserve and credit $10 to Inventory. To make the correct journal entry for obsolete inventory, you first subtract the disposition price from the value on your books. For example, you have $20,000 worth of appliances that aren’t moving, so you discount them 25 percent to a total of $15,000.
If any obsolete inventory has been identified, i.e. goods whose market values have dropped below their carrying values, such obsolete inventory must be written down to its market value. In this journal entry, the loss on inventory write down law firm bookkeeping account is an expense account that needs to be charged to the income statement for the period. So, you would need to write down the value of the obsolete inventory from its original cost ($80,000) to its net realizable value ($20,000).
The ultimate guide to obsolete inventory
That means that, as July ended, U.S. manufacturers and retailers were holding approximately $1.33 of inventory for every $1 in sales. With a large size of inventory, company will be facing high inventory cost as well. The company will try its best to minimize the inventory obsolete cost as it is the cost that does not provide any benefit to the customers or company.
This is a good option if you tried remarketing, discounting and bundling and it didn’t move enough product. While the price liquidators pay may be at or below cost, it’s still better than writing-off obsolete stock as a loss. Items that don’t sell well on their own may perform better as part of a package. Selling a core item with two or three related, inexpensive accessories could help you get rid of slow-moving or excess products. It’s a good idea to price the bundle lower than what it costs to buy all three items separately to encourage sales. Reviewing these and other inventory metrics regularly will help businesses improve purchasing and inventory management, which helps decrease obsolete inventory.
Sell It At a Discount
It represents the estimated value of the inventory that is no longer usable, sellable, or in demand. In this article, you will learn how to monitor and report inventory obsolescence reserve regularly, and why it matters for your financial performance and tax compliance. The journal entry for obsolete inventory reserve is often a best guess rather than hard numbers. However, you can’t be sure it will sell at that price, so you may have to adjust the reserve to reflect reality.
