Obsolete Inventory - Explained
What is Obsolete Inventory?
Written by Jason Gordon
Updated at June 26th, 2021
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What is Obsolete Inventory?
Inventory refers to the materials and goods that are a part of a firms stock, and are up for sale. Obsolete inventory, also known as excess inventory or dead inventory, is the inventory that remains unused when the product life cycle ends. This inventory remains unsold or unutilized for a long time with reduced possibility of being sold. Per Generally Accepted Accounting Principles (GAPP), such inventory is generally written off as a production an financial loss to the company.
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Why is Obsolete Inventory Important?
As per GAAP regulations, organizations must have an inventory reserve account where they can add obsolete inventory on the balance sheet. When making a journal entry for obsolete inventory, the company debits an expense account and credits a contra-asset account. The debit in expense account signifies that the expenses incurred on obsolete inventory. There is a credit to the contra-asset account under the related asset account. This reduces the net reported value of that asset account.