Obsolete Inventory: How To Identify, Reduce, & Manage It

Obsolete stock takes up valuable space that could instead be used for more profitable products; it also requires additional costs such as storage fees and increased insurance premiums. When the inventory loses its value, the loss impacts the balance sheet and income statement of the business. The amount to be written off is the cost of the inventory and the amount of cash that can be obtained by selling off or disposing of the inventory in the most optimal manner. “Even if you must write off obsolete inventory, your company can still try to sell it. There are many companies out there that purchase excess, obsolete, and overstocked inventory at reduced prices. Selling to a company like that will help you recover a portion of your costs.

You get the $7,000 figure by taking $700 for Product A and multiplying by the 10 units on hand. In regards to GAAP, once you have identified inventory that you cannot sell, you must write this inventory off as an expense. Assuming no receipt of payment for the inventory, you will debit a cost of goods sold account and credit either inventory directly or your inventory reserve account. GAAP requires that all obsolete inventory be written off at the time it’s determined obsolete. Therefore, if a company is not regularly reviewing their inventory for obsolescence they could have a large hit to their bottom line.

How Can AI and Machine Learning Streamline Your Obsolete Inventory Accounting?

“We have access to live inventory management, knowing exactly how many units we have in Texas vs. Chicago vs. New York. There’s also the option of remarketing items that are at risk of becoming obsolete. If the products still have potential, you could also sell them at a discount by running a promotion, such as a flash sale. Having access to supply chain data can help you improve supply chain efficiency, including law firm bookkeeping how well inventory is managed. Though inventory forecasting is rarely 100% accurate, it becomes even more challenging when there isn’t enough historical order data or market insights to help make the best decisions. If you were the manufacturer of mobile phone antennas, you were likely left with a lot of obsolete stock when smartphones started getting smaller and no longer needed external antennas.

One of the most common approaches is to try and realize the goods at a discount price. We can organize sales events and promotions to try and raise customers’ interest in the product. We write-down when the realizable value falls under the cost at which we have recorded Inventory. And as soon as the stock has no value and we plan to take it off our records, we have to write it off. Retaining obsolete Inventory only makes sense if future gross profits cover the accumulated holding costs. Such analysis aims to identify the slow-moving Inventory before it turns into a financial burden that puts stress on the business.

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Without proper inventory planning — including the tools and technology to help track inventory in real time — optimizing inventory levels can be a challenge. Finding a second home for inventory that’s lingered in the warehouse for too long is one way to recoup the cost of excess inventory. If a company forecasts certain SKUs will be top sellers for the first two quarters, it will naturally place large orders with the suppliers for those items.

• Using forecasts based on predictive analysis, you can determine which parts are needed on hand for frequent repairs, which sites need more repairs than others, and where you can turn in times of emergency.
• Katana’s software automates and streamlines the entire inventory management process, giving you visibility into your inventory levels in real time.
• In regards to GAAP, once you have identified inventory that you cannot sell, you must write this inventory off as an expense.
• The world is always changing, and other companies are coming out with newer, better versions of the same product.
• The inventory net balance will reduce by $ 40,000 as the allowance for inventory obsolete is the contra account of inventory.