Journal entry to write off lost inventory

Introduction

In the business, there may be a case of inventory loss for various reasons. In this case, we need to make the journal entry to write off the lost inventory in order to remove them from our balance sheet.

In accounting, the inventory is recorded as a current asset on the balance sheet. Likewise, the lost inventory should be removed from the balance sheet as it no longer exists on the balance sheet.

Hence, writing off the lost inventory is necessary in this case as it helps to prevent the overstatement of the total assets on the balance sheet. Additionally, as the lost amount needs to be charged to the income statement as an expense for the period, writing off the lost inventory will also prevent the understatement of total expenses on the income statement.

Journal entry to write off the lost inventory

We can make the journal entry to write off the lost inventory by debiting the loss on inventory write-off account and crediting the inventory account.

In this journal entry, the loss on inventory account is an expense account that we need to charge to the income statement for the period. At the same time, the credit of the inventory account represents the decrease of the inventory balance on the balance sheet as a result of the loss that occurred.

Writing off the lost inventory example

For example, on December 31, we have performed the physical count of the merchandise inventory in order to close the company’s accounts at end of the accounting period as we use the periodic inventory system.

However, after the count and reconciliation, we found out that there was a $10,000 loss in the merchandise inventory for some reason. Hence, we decide to write off the lost inventory in order to remove them from the balance sheet.

In this case, we can make the journal entry to write off the lost inventory by debiting the $10,000 to the loss on inventory write-off account and crediting this same amount to the inventory account to remove this lost amount of inventory from the balance sheet.

This journal entry will decrease the total assets on the balance sheet by $10,000 as of December 31. And at the same time, it will increase total expenses on the income statement by the same amount.