Items such as technology products with high market value can become obsolete after a few months.

Damage due to inadequate storage and handling.

Inventory, such as fruits and flowers, maybe spoilt due to their short shelf life.

Inventory is stolen by shippers, shoplifters or employees.

This could happen due to the following reasons: This is why it’s important for businesses to account for inventory write-off when the value of inventory changes significantly. The accurate value of inventory is crucial in calculating gross profit or loss.

The problem with this is that it distorts the gross margin of the business, as there is no matching revenue entered for the sale of the product. If the inventory write-off is inconsequential, the inventory write-off is charged to the cost of goods sold account. The reduction in retained earnings, in turn, decreases the shareholders’ equity in the balance sheet.A reduction of the business’ net income and therefore, its retained earnings.The expense item, in any case, appears as an operating expense.

Next, credit the inventory shrinkage expense account in the income statement to reflect the inventory loss. The value of inventory to be written off is: If you decide to write-off $20,000 worth of inventory from the $80,000 worth of inventory that your business has at the end of the year, you must first credit the inventory account with the value of the write-off to reduce the balance. To write-off inventory, you must credit the inventory account and record a debit to the inventory. If specific inventory items have not been identified, businesses can set up a reserve for inventory write-offs. The amount to be written off is the cost of the inventory and the amount of cash that can be obtained by selling off or disposing of the inventory in the most optimal manner. When the inventory loses its value, the loss impacts the balance sheet and income statement of the business. If you need income tax advice please contact an accountant in your area. NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. How Does a Write-Off Affect the Income Statement?.It’s done by charging it to the cost of goods sold or by balancing the obsolete inventory allowance in the books. Inventory write-offs are done to support accounting accuracy objectives while also reducing the tax liability for business owners. The inventory may lose its value due to damage, deterioration, loss from theft, damage in transit, changes in market demands, misplacement etc. You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.Inventory write-off refers to the accounting process of reducing the value of the inventory that has lost all of its value. Support items reported on your tax returns You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement. You will use the basis to figure the gain or loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses. Your basis is the amount of your investment in property for tax purposes. Unless you record them when they occur, you may forget expenses when you prepare your tax return. You will receive money or property from many sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. A balance sheet shows the assets, liabilities, and your equity in the business on a given date.An income statement shows the income and expenses of the business for a given period of time.You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success. You need good records to monitor the progress of your business. Support items reported on your tax returns.Keeping good records is very important to your business. Good records will help you do the following:

Business advantages of a writedown