Thus, the balance sheet and the accounting equation will show a reduction in inventory and in owner's or stockholders' equity. Since the amount of the write-down of inventory reduces net income, it will also reduce the amount reported on the balance sheet for owner's equity or stockholders' equity. If the amount of the Loss on Write-Down of Inventory is significant, it should be reported as a separate line on the income statement. If the amount of the Loss on Write-Down of Inventory is relatively small, it can be reported on the income statement as part of the cost of goods sold. A write-down is similar to a write-off, but where you completely nullify the value of the asset in the latter method, with a write-off you can carry on claiming. Announcements which indicate only the fiscal year in which the write-off will be included in income are listed in the n/a column. Under FIFO and average cost methods, if the net realizable value is less than the inventory's cost, the balance sheet must report the lower amount. Example of Reporting a Write-down in Inventory The debit in the entry to write down inventory is recorded in an account such as Loss on Write-Down of Inventory, which is an income statement account. Under accrual accounting, you may choose to set up an inventory reserve to anticipate future losses. Often the balance in the current asset account Inventory is reduced through a credit to a contra inventory account, which is referred to as a valuation account. Under FIFO and average cost methods, when the net realizable value of inventory is less than the cost of the inventory, there needs to be a reduction in the inventory amount. How do you report a write-down in inventory? Definition of Write-down in Inventory
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