What is an inventory write-down and how does it impact the balance sheet?

When the market value of your inventory drops below the value of that same inventory on your balance sheet, it takes an accounting process called an inventory write-down to record this loss in value. This inventory retains some value and is still considered sellable.

Write-downs record a reduction in the value of the inventory. If the inventory needs to be zeroed out or loses all of its value, the accounting process called an inventory write-off is used.

Inventory that has become obsolete, spoiled, or damaged often triggers the need for an inventory write-down. Raw materials, finished goods and even in-process products may depreciate throughout the year. Ordering too much inventory, or ending up with too much on hand is often the culprit. Therefore tracking inventory, not only its count and location, but serial numbers and expiration dates is important. With accurate, real-time data and the ability to track inventory trends or forecast demand, your teams have more control over inventory and are better enabled to help avoid the need for write-downs.

Inventory write-downs can impact your company’s balance sheet, income statement and net income. Once Accounting has determined the write-down amount, they need to determine whether it is significant. If the amount is considered small, they may choose to factor the decrease in the cost of goods sold (COGS). If the amount is larger and thus more significant, the write-down will most commonly be recorded as a separate line on the income statement.

You can learn much more about inventory write-downs here.

Using accurate, real-time data within streamlined financial and workflow processes, companies in a variety of industries rely on Sage Intacct and its multi-entity, Intelligent GL to connect their financial and operational data, helping them gain visibility and control of their inventory, whether it’s in a single supply room, a warehouse, or multiple locations. Those companies can be found in the following industries: