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Can you please confirm that I have correct entry for inventory write-down & write-off:
Inventory Write-down:
DR Cost of Sales
CR InventoryInventory Written-off:
DR Retained earnings
CR InventoryBut I have a reason to argue that I have seen that inventory write-down also impact on retained earnings such as this question in the past which states:
Slow-moving inventory which had selling price of $1.2m where these products have a gross profit margin of 20%. The inventory was sold after the year-end for 50%.[here what I do)
DR Cost of Sales [0.48m]
DR Retained earning [0.48m]
CR Inventory [0.48m]As you have seen that the inventory write-down also impact retained earnings but in the previous entry it does not. Can you tell me a reason why??
The entries for write-down’s and write-off’s are the same (a write off is simply writing it down to zero). Dr SOPL Cr Inventory.
The reason your example affects the retained earning is that the inventory was sold after the year end. The inventory must be valued at the lower of cost and net realisable value. Since the NRV is lower, it must be valued at the NRV which will reduce the profit. Reducing the profit automatically reduces the retained earnings.
I do suggest that you watch my free lectures on all of this. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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