Reducing Inventory Write-Offs
An inventory write-off occurs when a company formally acknowledges that products initially intended for sale have depreciated to the point where they are no longer marketable — rendered as dead stock or obsolete inventory. Several reasons may contribute to a company’s inability to sell its entire inventory, including raw materials, parts, and finished goods. Obsolescence of some items can result from technological advancements, such as the introduction of faster equipment like computers or cell phones, or more sophisticated software. Additionally, changing fashion trends, as seen in clothing or home décor, can leave items unsold on shelves. Perishable goods reaching their expiration date or spoiling, as well as damaged, stolen, or lost items, are also ineligible for sale. Inventory is listed as an asset on a company’s balance sheet. If it is determined that a certain inventory item will not be sold, the company decreases its gross inventory by the cost of the obsolete item. A corresponding expense of the same amount is recognized on the income statement. If the expense is minor, it can be included in the cost of goods sold. However, for more significant write-offs, it is recommended to treat them as a separate item rather than modifying the original entry. This approach facilitates loss tracking and minimizes the risk of distorting the gross margin.