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How do you report a write-down in inventory?

A write-down in a company's inventory is recorded by reducing the amount reported as inventory. In other words, the asset account Inventory is reduced by a credit or a contra inventory account is credited. The debit in the entry to write down inventory is reported in an account such as Loss on Write-Down of Inventory, an income statement account.

If the amount of the Loss on Write-Down of Inventory is relatively small, it can be reported as part of the cost of goods sold. If the amount of the Loss on Write-Down of Inventory is significant, it should be reported as a separate line on the income statement.

Since the amount of the write-down of inventory reduces net income, it will also reduce the amount reported as owner's equity or stockholders' equity. Hence for the balance sheet and in the accounting equation, the asset inventory is reduced and the owner's or stockholders' equity is reduced.