What Is Inventory Impairment?

Although the initial measurement of inventories has been accounted for by cost, damage to the inventory and decline in obsolete prices may occur after the inventory enters the enterprise. On the balance sheet date, inventory is measured at the lower of cost and net realizable value.

Inventory impairment

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Although the initial measurement of inventories has been accounted for by cost, damage to the inventory and decline in obsolete prices may occur after the inventory enters the enterprise. On the balance sheet date, inventory is measured at the lower of cost and net realizable value.

Chinese name

Inventory impairment

Foreign name

Inventory impairment

Attributes

Accounting Measurement

Pinyin

cún huò jin zhí

1. Accrual and reversal of inventory depreciation provisions

   At the balance sheet date, inventory is measured at the lower of cost and variable net worth. Provisions for the decline in value of inventories shall be made for the net realizable value below the cost, which shall be included in the asset impairment loss. If the original factors that caused the impairment have disappeared, the amount of impairment shall be recovered within the amount of the inventory depreciation reserve that was originally accrued.

   Net realisable value = Estimated selling price of inventory-Estimated costs to be incurred upon completion-Estimated selling expenses and taxes

   Hint: The net realizable value is characterized by the estimated future cash flow of the inventory, rather than the selling price or contract price of the inventory.

2. Carry forward of inventory depreciation provisions

   When an enterprise sells its inventory, it shall carry forward the inventory depreciation reserve corresponding to that inventory at the same time. When carrying forward, the main business cost or other business costs are deducted, and the "Inventory depreciation reserve" account is debited, and the "main business cost" and "other business costs" are credited.

   Example: Company A uses first-in, first-out method to calculate inventory issue pricing. At the beginning of 2015, the book balance of inventory M is 8 million yuan, and the inventory depreciation reserve is 500,000 yuan. The cost of purchasing M commodities this month is 2.3 million yuan. The monthly carry-over cost of M products is 6 million yuan. The estimated closing price of the inventory at the end of the period is 4.2 million yuan. The estimated selling cost is 800,000 yuan. Without considering other factors, how much is the inventory depreciation provision for this month?

   [Analysis] When an enterprise sells its inventory, it needs to carry forward the inventory depreciation corresponding to the inventory at the same time. Therefore, the entry for the cost of the M product sold this month is:

   Borrow: Main business cost 562.5

   Provision for inventory depreciation 37.5 [50 * (600/800)]

   Credit: Inventory goods 600

   At this time, the balance of the inventory depreciation reserve is 50-37.5 = 12.5 (ten thousand yuan).

   Net realizable value of M commodities at the end of the period = 420-80 = 340 (ten thousand yuan), and the book balance of M commodities at the end of the period = 800 + 230-600 = 430 (ten thousand yuan), that is, the balance of the inventory depreciation reserve at the end of the year is 430-340 = 90 (10,000 yuan), so the inventory depreciation reserve that should be made up = 90-12.5 = 77.5 (10,000 yuan).