Obsolete Inventory: Book vs Tax Write-Off

Ultimately, your inventory may have become so obsolete that there’s no demand for it whatsoever. If even a highly-experienced liquidator refuses your inventory, writing off the obsolete products may be your best bet. While businesses will often liquidate all of their inventory before closing shop, a company can always consider liquidating a certain segment of their inventory that’s fallen into obsolescence. To liquidate inventory, you’ll want to work with a surplus reseller specializing in moving “unwanted” inventory. Unlike running a sale on bundling inventory, liquidation will not aim to cover costs. Instead, the goal of liquidation is to make a tiny dent in the losses. Have you ever shopped for Halloween candy on November 1st or red roses on February 15th?

• We write-down when the realizable value falls under the cost at which we have recorded Inventory.
• Also, make sure you confirm the process with your local tax authorities, as there may be some requirements or limitations.
• Readers with specific questions should refer to the applicable standards or consult with an attorney.

The Distributor Principles have owned, run, managed, and advised successful distribution companies for many years. Areas of particular specialization include Strategic Planning, Mergers & Acquisitions, Technology, Operations inventory obsolete and Sourcing.Visit or e-mail Finally, if inventory write-offs and outside warehousing are continuous problems, you may want to consider assigning the disposition and prevention responsibility to a specific person.

Why Does Obsolete Inventory Matter?

Gathers near- and real-time data using barcode or RFID and finds trends to prevent stockouts and overstocks. Tracks receipt, transfer or packing of items by lot or serial number, pallet, location or date and notes where the stock resides in the warehouse. Traces and supports inventory processing as items move through warehousing and production phases to delivery or sales.

Dead and obsolete inventory should be a huge financial pain point for material managers; for industrial firms in particular, it costs millions of dollars each year. Obsolete is different from slow-moving inventory in a few ways, but mostly due to its reaching a particular timeline.

Fill out the form below to see Clear Spider’s Vaccine Management System live!

Or we can offer a client a reduced price if he purchases a batch using some of the obsolete inventory in the assembly. Situations that cause usage trends to change quickly are at times self-generated. For instance, when new products are introduced, and previous versions are not phased out properly, a usage/sales trend line can immediately change without warning. Good https://www.bookstime.com/ communication between product development, sales, purchasing and inventory control, is essential. But to move the product faster and get more cash for it, the company decided to bundle the product with two best-selling wines, a red and a white. The store is able to charge more for the set once they add champagne—and customers continue to purchase the bundle.

Whatever your options to reduce inventory levels, the first step is to identify which items are potentially in excess and at risk of becoming problematic, whether raw materials or finished goods. Hopefully, this offers you a new method to identify inventory issues before they become a financial burden. To make the correct journal entry for obsolete inventory, you first subtract the disposition price from the value on your books.

How to deal with Obsolete Inventory/Stock:

Central City Electronics only gets monthly inventory reports, so it doesn’t realize the problem until it’s too late. At that point, even most liquidators aren’t interested in TVs with this outdated technology. In a recent Brainyard panel of retailers, distributors and manufacturers, the majority of participants cited forecasting demand as a top area of concern. To learn more about how ShipBob can help you optimize your supply chain, click the button below to start the conversation. Inventory visibility, it will be hard to understand how much of each product you need to restock and when (and what product might be worth discontinuing). If that’s the case, you can avoid over-ordering by buying less inventory more often rather than purchasing inventory for an entire year.

• Most companies in the manufacturing and retail industries have Inventory.
• Force yourself to look at the C’s and D’s on the bottom of the list at least once a quarter and take action.
• This could also affect the viability of an acquisition that you may be considering to take your business to the next level.
• Obsolete inventory is also known as excess inventory or dead inventory.

If it’s a significant amount, it implies that your inventory management isn’t as good as it should be. This gives companies an incentive to fudge, delaying recognition or reporting it in small increments. However, GAAP rules require you to make a journal entry for obsolete inventory as soon as you’re aware of the issue. This experience convinces the business to invest in an inventory management system that will update inventory numbers in real time. The system also allows Central City Electronics employees to view inventory turn and days of inventory on hand by product category or SKU and notifies them when it’s time to place a new purchase order—with suggested quantities.

Bring us your most complex inventory problems.

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​. Subtract that from the ​$20,000​ and make a ​$5,000​ journal entry for obsolete inventory reserve. You report this as a credit to Inventory Reserve and a matching ​$5,000​ debit to Cost Of Goods sold. While you can always try to recoup some of your obsolete inventory costs, it’s still a losing proposition. And while some inventory obsolescence is simply the cost of doing business, there’s plenty your company can do to reduce that risk. When an organization has exhausted all other options, it must write-off obsolete inventory as a loss.

It is crucial to include an Inventory analysis as part of our month-end procedures to ensure that we follow the trends with which our stock moves. Looking at those over time will give us the insight we need to improve inventory management and planning.

Here is what to do if you end up carrying inventory that has become unsellable. Historical order data or market insights to help make the best decisions.