How to Depreciate Office Equipment
No matter how careful a business owner tries to be or the quality of the business’ security system, a business can still become the victim of theft. Theft of assets must be recorded on the accounting books in order to properly reflect the loss of the asset and the resulting cost of the loss. Any costs resulting from theft, such as door or lock repair, can also be recorded as theft expense.
Reduce the asset account on the balance sheet associated with the theft. For example, if cash was stolen, reduce the balance in the cash account by the amount that was taken. If office equipment was stolen, reduce the office equipment asset account by the total amount paid for the office equipment.
Reduce the accumulated depreciation account by the amount of accumulated depreciation on any depreciable stolen assets. For example, if you paid $500 for a copier that was stolen and you have taken $100 in depreciation expense, then reduce the accumulation depreciation account by $100.
Reduce the owner’s equity account on the balance sheet by the net of the reduction to assets and the reversal of accumulated depreciation. For example, the $500 copier with $100 in accumulated depreciation would result in a reduction to owner’s equity of $400. The entire amount of stolen cash is deducted from owner’s equity.
Create a theft expense account on the income statement.
Record the entire amount of stolen cash as a theft expense and/or the net amount of assets less accumulated depreciation. If you had other expenses associated with the theft, such as door or window repairs and lock rekeying, also record those expenses to the theft expense account.
If you are uncertain how to properly record a loss from theft, consult with an accounting professional in order to properly reflect the loss on your accounting books.
- Principles of Accounting; A. Douglas Hillman, Richard F. Kochanek and Corine T. Norgaard
Kaye Morris has over four years of technical writing experience as a curriculum design specialist and is a published fiction author. She has over 20 years of real estate development experience and received her Bachelor of Science in accounting from McNeese State University along with minors in programming and English.
September 4, 2019
Inventory write-offs are unfortunate but necessary when inventory goes missing, is damaged, or loses value on the market. Following a proper accounting process is critical when writing off inventory: otherwise, your balance sheet and income statement will become more and more mismatched with each write-off until you have a major budget problem.
There is a simple write-off process that you can follow to avoid this and ensure your financial statements stay accurate. Furthermore, a 3PL like ShipBob can streamline your inventory management and fulfillment processes to prevent future write-offs and make your capital more productive.
Read on to learn everything you need to know about inventory write-offs:
- Why inventory is written off
- How to account for written off inventory
- How a 3PL can minimize write-offs
What is an inventory write-off?
Inventory write-off is the process of removing or reducing the value of inventory, that has no value for businesses from their accounting records. Inventory is written off for various reasons, such as when inventory has lost its value and cannot be sold due to damage, theft, loss, or decline in market value.
Write-down vs write-off
Inventory write-downs are similar, but less drastic than a write-off. Inventory is written down when an asset’s value must be reduced in accounting, whereas a write-off is when an asset loses all of its value and must be removed from accounting records entirely.
When to write off inventory
Nearly any business that maintains inventory on hand will have to write-off a portion of it at some point in their journal entry . Here are the most common reasons inventory is written off.
1. Inventory is stolen
Unfortunately, inventory has a tendency to disappear. It may be stolen earlier in the supply chain before it even reaches you, or by shoplifters, or even employees. When your inventory counts don’t match what you have on hand, theft may be the culprit.
2. Inventory has been damaged at any part of the supply chain
For inventory to maintain its value it must arrive in fit condition to be sold. But, of course, this doesn’t always happen. Things can go wrong during any point of the supply chain, leading to damaged or defective products, and become unsellable as a result. You should be reimbursed by the supplier, but in the meantime you will have to write-off the damaged inventory.
3. Inventory isn’t relevant to the market anymore
Market demand changes rapidly, and a product that you thought would be a big seller a year ago may have become obsolete in the market (like 3D TVs or hoverboards). Now, with all this obsolete inventory on hand and nothing to do with it, you might have to consider writing it off.
4. Inventory was perishable
Businesses that handle food, drinks, or anything perishable will be all too familiar with this scenario. Do your best to not overbuy and cycle through dates properly, but any products that reach an expiration date will have to be written off.
How to write off inventory in 5 simple steps
Accounting for inventory write-offs and inventory reserves are just a matter of accurately assessing damage/losses and charging them to the right account. Then, you need to trace the source of the damage or inventory losses to prevent it from happening again.
1. Assess your damage
The first step is to determine how much inventory is damaged and must be written off from the gross inventory. For instance, if you receive a shipment with damaged or defective product, first separate the damaged inventory from any that might still be sellable.
2. Calculate losses
Now that you know exactly how many inventory items are damaged, calculate the losses by multiplying the cost-per-unit by the number of damaged units.
3. Account it as an expense
Businesses typically set up an inventory write-off expense account to record the value of inventory written off from the current assets. When you add to the inventory expense account, you must reduce the amount of inventory.
4. Debit COGS while crediting inventory-write off
On your balance sheet, debit cost of goods sold (COGS) and credit your inventory write-off expense account. If you’re only writing off small amounts of inventory, you can also just debit your COGS account and credit your inventory account.
5. Assess the error
Finally, you need to get to the bottom of the write-off to prevent it from happening in the future. If inventory was damaged, how did the damage occur? If counts are off and inventory disappeared, trace it through the supply chain and figure out where it went missing.
Inventory write-offs and ecommerce
Ecommerce businesses often see inventory and fulfillment as a cost center, but what if, with the right inventory solutions, it could actually drive revenue? Holding more inventory than you can sell is an unproductive use of capital and also leads to write-offs.
A 3PL like ShipBob can optimize your supply chain and make inventory accounting more efficient, which minimizes the amount of capital tied up in inventory and minimizes inventory write-offs.
Minimizing inventory write offs with a 3PL
In a traditional supply chain the upstream activities of purchasing and manufacturing are disconnected from actual demand for the product. This is a chief cause of inventory write-offs, as sales and demand aren’t feeding back into purchasing decisions.
A 3PL like ShipBob, on the other hand, integrates with your sales and distribution processes as well as upstream purchasing and manufacturing. This makes the supply chain more agile and responsive, and minimizes inventory build-up. For instance, ShipBob allows you to set reorder points, so inventory is ordered automatically in the right amounts to meet demand when you need it most.
The accounting terms and processes of writing off inventory are a generally accepted accounting principle , but preventing inventory write-offs is much trickier. It requires accurately forecasting demand, accurately accounting for the value of the inventory , current inventory market prices and strategically placing orders at the right time and in the right amount.
ShipBob’s inventory management software can help prevent write-offs by centralizing your data in one place and automating the reorder process. Learn more about our fulfillment services and more by speaking with a fulfillment expert and requesting a pricing quote below.
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If you suffer a theft in the course of your business or trade, you may be entitled to a tax deduction equal to your loss. The theft can be anything from embezzlement to robbery, as long the action is illegal and you report it as a crime. The lost property can be money, equipment, supplies or even items owned by an employee for use on the job.
Types of Thefts Covered
The Internal Revenue Service defines theft as any crime involving “the taking and removing of money or property with the intent to deprive the owner of it.” The definition covers burglary, robbery, embezzlement, extortion and even blackmail. The taking of money through fraud or misrepresentation also counts as theft if the action violates state or local law. Filing a police report helps you document the theft in the event the IRS asks you to substantiate your deduction.
Calculating Loss (or Gain)
The amount of loss you can deduct on your tax return is usually equal to the fair market value of all the stolen property, minus any reimbursement you can claim from insurance coverage. If you claimed depreciation on any of the property in previous years, you can only count your adjusted basis in the property as its value. If your insurance pays you more than your adjusted basis, you have to pay income taxes on the gain unless you use the money to replace the stolen property within two years.
Forms to Use
You must calculate your total business theft losses using Form 4684, “Casualties and Thefts.” If you are a business owner, you must report the total from Form 4684 on Line 14 of your Form 1040 as “Other gains (or losses).” If you are an employee and the stolen property was required for your job, you must report the total on Form 4684 on Line 28 of Schedule A as “Other miscellaneous deductions.” You can only deduct the total as an employee if you itemize deductions.
Special Rules for Inventory
If the theft results in a loss of your inventory, such as items you hold for sale, you do not have to use Form 4684. You have the option of deducting the theft by increasing the cost of goods sold when you complete your Schedule C. Simply deduct the value of the stolen items from your closing inventory. This increases your total business expenses, resulting in the same deduction. If you take this route, you cannot take a deduction for those same items on Form 4684.
Your small business clients who suffer inventory shrinkage – whether it’s from a natural disaster like Hurricane Harvey or Irma, or theft or simple mismanagement – must account for the event on their financial books. Generally, a firm can enter a .
The devastation caused in Texas, Florida, the East Coast and the Caribbean by Hurricanes Harvey and Irma is dominating the news. In addition to individuals driven from their homes by floods and torrential rain, businesses are being forced to shutter their doors. In many cases, valuable goods and inventory are being destroyed or washed away.
Your small business clients who suffer inventory shrinkage – whether it’s from a natural disaster like Hurricane Harvey or Irma, or theft or simple mismanagement – must account for the event on their financial books. Generally, a firm can enter a loss in its financial statements and deduct the loss on its tax return in one of two ways.
For starters, to account for an inventory loss, the firm creates a transaction crediting the inventory asset account for the loss. The offsetting debit depends on the amount of the loss. If the loss is on the small side – say, for a business on the fringe of the Harvey flood zone – the firm can directly debit its cost of goods sold (COGS) account. However, for businesses in the direct path of the storm where loss of inventory is massive, debiting COGS in this way substantially reduces your gross profits and complicates matters.
As an alternative, the business might debit an expense account specifically created to reflect losses from inventory shrinkage. This avoids any great distortion of gross profits through a mammoth loss.
Under generally accepted accounting principles (GAAP), the firm must match expenses to the periods in which they occur. Accordingly, a firm may establish special reserve accounts for shrinkage losses. There are four basic steps.
1. Estimate the shrinkage loss at the beginning of the period.
2. Designate an expense account to reflect inventory shrinkage for the estimated loss.
3. Debit the expense account or COGS for the same amount.
4. When actual losses are determined, debit the reserve account and credit inventory by the loss amount.
Under the rules for deducting inventory shrinkage losses for tax purposes, a firm may incorporate the loss into COGS or report it separately. Shrinkage reduces your ending inventory and thus increases COGS. In effect, this lowers gross profit and the amount of taxable income. The net result is a tax savings through the loss.
Alternatively, if the firm chooses to deduct inventory shrinkage costs separately, it must reduce its beginning inventory or purchases by the amount of the loss, thereby lowering the COGS.
With either method, a claim must be filed if damaged inventory was insured. If reimbursement is expected, the loss should be reduced and the reimbursement is excluded from gross income. However, if the year ends before insurance reimbursements are received, the firm may estimate and deduct its unreimbursed loss.
These rules are complex and clients will be looking to you for guidance during a tumultuous time. This is an opportunity to solidify existing relationships and foster new ones.
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Types of Inventory Valuation
Businesses that have inventory on hand must account for any inventory gain and loss at the end of an accounting period. Inventory losses are due to such things as theft, obsolete merchandise and broken or damaged goods. Businesses are required to take an on-hand physical inventory count of all merchandise at least once a year and then make an adjustment to inventory based on the loss discovered.
Periodic and Perpetual Methods
Companies with inventory use one of two common methods to account for that inventory: the periodic method or the perpetual method. The periodic method records all inventories into one account, where they remain until a physical inventory count is taken. When this occurs, the inventory account is credited for the difference. The perpetual method is a computerized method that records all inventories when they are purchased, and as they are sold the inventory gets credited out of the account immediately.
FIFO, LIFO and Weighted Methods
Companies use different types of methods to account for the sale of inventory. One is first in, first out, or FIFO, which means the first inventory purchased is the first inventory sold. This removes older items from the balance sheet first, and follows the logic that older items should be used up first to avoid obsolescence.
Last in, first out or LIFO, is another method and the exact opposite of FIFO. This method states the last inventory purchased is the first sold and the older items are reported as inventory. If the prices of inventory are rising, LIFO results in the lower cots of older items being reported as inventory.
Other companies use a method called weighted average, which measures the sale of goods based on their average cost.
Loss Due to Obsolete Merchandise
When a company takes a physical inventory count at the end of a period, it may discover obsolete or out-of-date merchandise. When this happens, the difference in cost needs to be recorded on the books to keep the inventory account as accurate as possible.
If a company has 100 items recorded on the books for $10 each, but it figures the items are really worth only $6 each, an adjusting entry needs to be made. In this case, an inventory loss journal entry of $400 would be debited to the Cost of Goods Sold account and $400 would be credited to the Inventory account. This reduces the cost of inventory shown in the bookkeeping records.
Inventory Loss Due to Damage
Often, a company accepts returns that are damaged goods. These goods are sometimes returned to the manufacturer, but not always. If they are not returned to the manufacturer, the company must write off the damaged goods so they are not part of the inventory count. To do this, the damaged stock entry would be a debit to Cost of Goods Sold and a credit to Inventory.
Inventory Loss Due to Theft
No matter how good a company’s internal controls are, theft may sometimes occur. The difference between what the inventory is supposed to be and what it is calculated at is usually because of theft by employees and customers. The inventory account needs to be adjusted because of this. When theft is discovered during a physical inventory count, the business must debit the Cost of Goods Sold account and credit the Inventory account.
- Accounting Coach: How Do You Report a Write-Down in Inventory?
- Patriot Software: What Is Inventory Shrinkage?
- Investopedia: Inventory Write-Off
- FASB. “Statement of Financial Accounting Concepts No. 6,” Page 2. Accessed Sept. 9, 2020.
- FASB. “Accounting Standards Codification: 330 Inventory; 10 Overall; S99 SEC Materials.” Accessed Sept. 9, 2020.
Jennifer VanBaren started her professional online writing career in 2010. She taught college-level accounting, math and business classes for five years. Her writing highlights include publishing articles about music, business, gardening and home organization. She holds a Bachelor of Science in accounting and finance from St. Joseph’s College in Rensselaer, Ind.
Reporting an Asset Missing or Stolen
There may be times when you need to report a lost or stolen asset, or you come across an asset previously reported as lost or stolen. If an asset is missing or stolen, notify your department manager, supervisor and the Inventory Contact Person (ICP). If the asset is a computing device, submit a Tech Café ticket to assist you in determining if the device is reporting on the network. If Category 1 data was stored or present on the computing device, send a copy of the form to the Office of Information Security . You can use the same form to report missing, reinstated, stolen and recovered assets.
How to Report a Missing Asset
If you conduct a thorough search and the university asset cannot be found, and no evidence of theft is apparent (e.g., forced entry, etc.), then the item is considered missing. Follow the below steps to report the missing asset:
- Download the Missing Property/Reinstatement Form, select Missing and fill out the rest of the form
- Obtain the required signatures
- Email the form, along with all supporting documentation, to the UTSA property manager in the Financial Services and University Bursar Office
- Inventory staff will mark the asset missing, and the asset will remain on your department’s inventory while you continue to search
- Inventory will send a completed copy of the form to your department ICP
- Your vice president will be notified of the disposal if the asset has not been found after two years
The UTSA property manager will determine negligence for assets reported as missing.
How to Reinstate a Missing Asset
If you are successful in finding the missing item, follow these procedures to report it:
- Download the Missing Property/Reinstatement Form, select Reinstatement and fill out the rest of the form
- Obtain the appropriate signatures
- Email the form to the UTSA property manager in the Financial Services and University Bursar Office
- Inventory staff will place the item back in service on your department’s inventory and send a completed copy to your department’s ICP
How to Report a Stolen Asset
When there is evidence of forced entry and the taking of property, items are considered stolen, and you should follow the below steps to report it:
- Notify the police immediately
- If the theft occurred off campus, immediately file a theft report with local law enforcement; also report the theft to the UTSA Police Department
- If the theft occurred on campus, file a theft report with the UTSA Police Department within 24 hours to launch an investigation
- Download the Stolen/Recovered Property Report form, select Stolen and fill out the rest of the form
- Obtain the required signatures
- Email the form, along with all support documents, to the UTSA property manager in the Financial Services and University Bursar Office
- For off-campus incidents, supporting documents could include:
- Local police report
- Approved Removal of Equipment Form
- Copy of the approved Export Control Form, if theft happened outside the United States
- Inventory staff will remove the asset from your department’s inventory records and send a completed copy of the form to your department’s ICP
Negligence determination is made by the associate vice president of Financial Affairs for assets reported stolen.
How to Report a Recovered Stolen Asset
If a stolen item was found and returned to you, follow these procedures to report the recovered asset:
- Notify the UTSA Police Department
- Download the Stolen/Recovered Property Report, select Recovered and fill out the rest of the form
- Obtain appropriate signatures
- Email the form to the UTSA property manager in the Financial Services and University Bursar Office
- Inventory staff will place the item back in service on your department’s inventory and send a completed copy to your department’s ICP
The approximate cost of missing inventory is the difference between 1) the cost of the inventory that is actually on hand, and 2) the cost of the inventory that should be on hand based on the company’s records.
If the company uses accounting software along with the perpetual inventory method (and the system is updated, reviewed, and adjusted routinely) then you can subtract the actual inventory on hand from the amounts shown by the software. The difference is the approximate amount of missing inventory.
If the perpetual inventory method is not used (or the system is not maintained properly) you can do the following:
- Determine the cost of the inventory when the inventory was last counted. Perhaps this was the previous December 31.
- Determine the cost of all the goods that were purchased since December31.
- Combine Item 1 and Item 2 to arrive at the cost of goods available for sale.
- Determine the cost of goods sold percentage. This is 100% minus the company’s normal gross profit percentage. (This may appear on the income statements from the previous year.)
- Multiply the cost of goods sold percentage times the sales since December 31. The result is the approximate cost of goods sold.
- Subtract the approximate cost of goods sold (Item 5) from the cost of the goods available (Item 3). This is the approximate cost of goods that should be in inventory.
- Determine the cost of the goods that are actually in inventory.
- Subtract the cost of the goods that are actually in inventory (Item 7) from the cost of goods that should be in inventory (Item 6). The difference or shortage is the amount of missing inventory.
- What is the gross profit method?
- How do you calculate the cost of goods sold for a retailer?
- What is the difference between periodic and perpetual inventory systems?
- What is the gross profit method of inventory?
- What is safety stock?
- Is there a difference between the accounts Purchases and Inventory?
To learn more, see the Related Topics listed below:
Introduction to Inventory and Cost of Goods Sold
Did you know? To make the topic of Inventory and Cost of Goods Sold even easier to understand, we created a collection of premium materials called AccountingCoach PRO. Our PRO users get lifetime access to our inventory and cost of goods sold cheat sheet, flashcards, quick tests, business forms, and more.
Inventory is a key current asset for retailers, distributors, and manufacturers. Inventory consists of goods (products, merchandise) awaiting to be sold to customers as well as a manufacturers’ raw materials and work-in-process that will become finished goods. Inventory is recorded and reported on a company’s balance sheet at its cost.
When an inventory item is sold, the item’s cost is removed from inventory and the cost is reported on the company’s income statement as the cost of goods sold. Cost of goods sold is likely the largest expense reported on the income statement. When the cost of goods sold is subtracted from sales, the remainder is the company’s gross profit.
It is critical that the items in inventory get sold relatively quickly at a price larger than its cost. Without sales the company’s cash remains in inventory and unavailable to pay the company’s expenses such as wages, salaries, rent, advertising, etc.
It is common for a company to experience rising costs for the goods it purchases. As a result, the company’s costs may be different for the same products purchased during its accounting year. When this occurs, the company must decide which costs should be matched with its sales and which costs should remain in inventory. In the U.S., three of the cost flow methods for removing costs from inventory and reporting them as the cost of goods sold include:
FIFO or first in, first out. This cost flow removes the oldest inventory costs and reports them as the cost of goods sold on the income statement, while the most recent costs remain in inventory.
LIFO or last in, first out. This cost flow removes the most recent inventory costs and reports them as the cost of goods sold on the income statement, and the oldest costs remain in inventory.
Weighted average. This method calculates an average per unit cost and applies it to both the units in inventory and to the units sold.
In addition to selecting a cost flow method, the company selects one of the following inventory systems for recording amounts in its general ledger Inventory account(s):
The periodic system indicates that the Inventory account will be updated periodically, such as on the last day of the accounting year. Throughout the year, the goods purchased will be recorded in temporary general ledger accounts entitled Purchases. At the end of the year, the cost of the ending inventory will be calculated. The Inventory account balance will be adjusted to this amount. At this time, the cost of goods sold is also calculated.
The perpetual system indicates that the Inventory account will be continuously or perpetually updated. In other words, the balance in the Inventory account will be increased by the costs of the goods purchased, and will be decreased by the cost of the goods sold. Hence, the balance in the Inventory account should reflect the cost of the inventory items currently on hand. However, companies should count the actual goods on hand (take a physical inventory) at least once a year and adjust the perpetual records if necessary.
It is time consuming and costly for companies to physically count the items in inventory, determine their unit costs, and calculate the total cost in inventory. There may also be times when it is necessary to determine the cost of inventory that was destroyed by fire or stolen. To meet these problems, accountants often use the gross profit method for estimating the cost of a company’s ending inventory.
We will illustrate the FIFO, LIFO, and weighted-average cost flows along with the period and perpetual inventory systems. This will be done with simple, easy-to-understand, instructive examples involving a hypothetical retailer Corner Bookstore.
Inventory Is Reported at Cost
Inventory items are recorded at their cost. Cost is defined as all costs necessary to get the goods in place and ready for sale. For instance, if a bookstore purchases a college textbook from a publisher for $80 and pays $5 to get the book delivered to its store, the bookstore will record the cost of $85 in its Inventory account. The recorded cost will not be increased even if the publisher announces that additional copies will cost $100.
When the textbook is sold, the bookstore removes the cost of $85 from its inventory and reports the $85 as the cost of goods sold on the income statement that reports the sale of the textbook.
The recorded cost for the goods remaining in inventory at the end of the accounting year are reported as a current asset on the company’s balance sheet.
Periodic vs Perpetual Inventory Systems
Each cost flow assumptions can be used in either of the following inventory systems:
Under the periodic inventory system:
The amount appearing in the general ledger Inventory account is not updated when purchases of merchandise are made from suppliers or when goods are sold.
The Inventory account is normally adjusted only at the end of the year. During the year the Inventory account will show only the cost of inventory as of the end of the previous year.
Purchases of merchandise are recorded in one or more Purchases accounts.
At the end of the year the Purchases account(s) are closed and the Inventory account is adjusted to the cost of the merchandise actually on hand at the end of the current year.
There is no Cost of Goods Sold account to be updated when a sale of merchandise occurs.
There is no way to tell from the general ledger accounts the cost of the current inventory or the cost of goods sold.
Under the perpetual inventory system:
The Inventory account is continuously updated.
It is increased with the cost of merchandise purchased from suppliers.
It is reduced by the cost of merchandise that has been sold to customers.
The Purchases account(s) are not used in the perpetual inventory system.
There is a general ledger account Cost of Goods Sold that is debited at the time of each sale for the cost of the merchandise that was sold.
A sale of goods will result in a journal entry to record the amount of the sale and the cash or accounts receivable.
A second journal entry reduces the account Inventory and increases the account Cost of Goods Sold.