Obsolete Inventory In Financial Statement

Posted by Ana Orwel on Tuesday, April 28, 2009

Obsolete inventory or dead inventory means the inventory that has reached near the end of the product life cycle, but has not been sold or used in the given time bracket set by the industry.

These inventories are to be written down and can cause great losses to a company. The obsolete inventory in financial statement must be reflected and is a sign for all the investors to refrain from investing on the company, if such value of inventory is significant.

A huge figure of obsolete inventory on the financial statements reflects poor quality of products, poor inventory management, poor standards of production etc. These all can serve as indicators to an investor of how the products of a company are presently selling or are going to sell in the future.

To reflect obsolete inventory in financial statement properly, it is necessary to claculate the value of such inventory and include this value into the income statement thus reducing value of inventory on the balance sheet and increasing expenses in the income statement. The accounting entry for such action should be as follows:

D Expenses  XXXXX

   C Inventory XXXXX

If such accounting entry is not recorded and obsolete inventory stays on the balance sheet, its value will be overstated and misleading to the users of financial statements.

Find more information on inventory accounting here.