Journal Entry for Inventory Spoilage
Inventory is an important element of any business operation. It refers to the products, parts, materials, and other items a company has in stock for sale.
Having a comprehensive understanding of what is kept in inventory allows businesses to better understand their financial capabilities and purchase throughout the entire production process. Inventory also serves as an ongoing ledger that keeps organizations accountable for their purchases and assists with tracking the cost of goods sold or services completed over time.
Effectively managing inventory not only reduces operating costs but also helps businesses maintain customer satisfaction by having available products when needed.
When you run a business, it’s important to keep track of your inventory which is the goods or materials that you have on hand. In accounting, inventory is considered to be a current asset, which means that it can be easily converted into cash. That’s because businesses typically sell their inventory in order to generate revenue.
By keeping track of your inventory, you can make sure that you have enough goods on hand to meet customer demand, and that you’re not carrying too much inventory, which can tie up valuable resources.
It is also important to remember that not every item in your inventory will be sold. Some products may be damaged or spoiled, and others may simply not be popular enough to warrant continued stocking. As a result, businesses must account for both inventory and spoilage when making financial projections. Failure to do so can lead to serious financial troubles down the road. By keeping track of your inventory and spoilage, you can ensure that your business stays on solid footing.
Journal Entry for Inventory Spoilage
When the inventory gets spoiled, the company will not be able to sell them for a profit. They need to remove them from the balance sheet. The spoilage inventory will be moved from the balance sheet to the COGS on the income statement.
The journal entry is debiting COGS and credit inventory.
| Account | Debit | Credit |
|---|---|---|
| COGS | XXX | |
| Inventory | XXX |
The journal entry increases the cost of goods sold will be increased on the income statement. The inventory will be removed from the balance sheet as it will be disposed of.
Example
Company ABC is a retail store that sells a variety of goods to consumers. During the month, the company performed a physical inspection and found that some products are spoiled. The amount of inventory spoilage is $ 5,000. Please prepare a journal entry for inventory spoilage.
The company has found that $ 5,000 of inventory amount is spoilage. So they can’t sell it to the consumers for profit, they need to be removed from the balance sheet. And record it on the income statement as COGS.
The journal entry is debiting COGS $ 5,000 and credit inventory $ 5,000.
| Account | Debit | Credit |
|---|---|---|
| COGS | 5,000 | |
| Inventory | 5,000 |
The COGS will increase $ 5,000 on the income statement while the inventory is removed from the balance sheet for the same amount.