How should lost or stolen assets covered by insurance be accounted for?
How shall the insurance compensation in respect of the lost or stolen asset be accounted for?
Accounting treatment for lost or stolen assets depends on the nature of assets. For the purpose of accounting of lost or stolen assets, the accounting treatment may be classified into the following categories:
- Accounting for lost / stolen tangible fixed assets
- Accounting for lost / stolen stores and inventory
- Accounting for lost / stolen cash and other valuable assets
In all instances, the lost or stolen asset must be de-recognized from the balance sheet as no future economic benefits from the asset can be realized or controlled by the entity. Any insurance claim receipts must be accounted for separately rather than being adjusted in the carrying amount of the asset.
The treatment of loss varies slightly according to the nature of the asset as explained below. If the amount of loss is material, it may be necessary to present the loss separately in the income statement.
Accounting treatment for lost or stolen tangible fixed assets such as motor vehicles is similar to the accounting for disposal of such assets without any sale proceeds.
The fixed asset must be de-recognized from the statement of financial position and a loss must be recognized for the carrying amount of the lost or stolen asset.
Insurance compensation received or receivable on the asset may either be offset against the loss or presented separately as other income.
The accounting entries may therefore be summarized as follows:
Loss on asset theft
Property, plant and equipment (cost)
Bank / Insurance compensation receivable
Other income – Insurance compensation*
*This may instead be set off against the loss on asset theft.
Inventory & Stores
Accounting for stolen or lost inventory depends on whether periodic or perpetual system is being used by the entity.
Under periodic system, inventory balance is computed at the period end and a single accounting entry for the closing stock is posted. If the computation of the closing balance of inventory under such system excludes the amount of inventory lost or stolen, no separate accounting entry would be necessary as the cost of goods sold would increase as a result of the reduction in closing stock thereby reflecting the impact of lost or stolen goods.
Under perpetual system however, inventory balance is updated regularly throughout the accounting period. Any inventory pilferage will need to be accounted for in a similar manner to the normal inventory issues during the period. The following journal entry may therefore be recorded to account for the loss or theft of inventory, stores and spares:
How to Record Payroll Health Insurance Premium Payments in Accounting
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.
What Is an Inventory Write-Off?
An inventory write-off is an accounting term for the formal recognition of a portion of a company’s inventory that no longer has value. An inventory write-off may be recorded in one of two ways. It may be expensed directly to the cost of goods sold (COGS) account, or it may offset the inventory asset account in a contra asset account, commonly referred to as the allowance for obsolete inventory or inventory reserve.
- An inventory write-off is the formal recognition of a portion of a company’s inventory that no longer has value.
- Write-offs typically happen when inventory becomes obsolete, spoils, becomes damaged, or is stolen or lost.
- The two methods of writing off inventory include the direct write off method and the allowance method.
- If inventory only decreases in value, instead of losing it completely, it will be written down instead of written off.
Understanding Inventory Write-Off
Inventory refers to assets owned by a business to be sold for revenue or converted into goods to be sold for revenue. Generally accepted accounting principles (GAAP) require that any item that represents a future economic value to a company be defined as an asset. Since inventory meets the requirements of an asset, it is reported at cost on a company’s balance sheet under the section for current assets.
In some cases, inventory may become obsolete, spoil, become damaged, or be stolen or lost. When these situations occur, a company must write off the inventory.
Accounting for Inventory Write-Off
An inventory write-off is a process of removing from the general ledger any inventory that has no value. There are two methods companies can use to write off inventory: the direct write-off, and the allowance method.
Direct Write-Off Method vs. Allowance Method
Using the direct write-off method, a business will record a credit to the inventory asset account and a debit to the expense account. For example, say a company with $100,000 worth of inventory decides to write off $10,000 in inventory at the end of the year. First, the firm will credit the inventory account with the value of the write-off to reduce the balance. The value of the gross inventory will be reduced as such: $100,000 – $10,000 = $90,000. Next, the inventory write-off expense account will be increased with a debit to reflect the loss.
The expense account is reflected in the income statement, reducing the firm’s net income and thus its retained earnings. A decrease in retained earnings translates into a corresponding decrease in the shareholders’ equity section of the balance sheet.
If the inventory write-off is immaterial, a business will often charge the inventory write-off to the cost of goods sold (COGS) account. The problem with charging the amount to the COGS account is that it distorts the gross margin of the business, as there is no corresponding revenue entered for the sale of the product. Most inventory write-offs are small, annual expenses. A large inventory write-off (such as one caused by a warehouse fire) may be categorized as a non-recurring loss.
The other method for writing off inventory, known as the allowance method, may be more appropriate when inventory can be reasonably estimated to have lost value, but the inventory has not yet been disposed of. Using the allowance method, a business will record a journal entry with a credit to a contra asset account, such as inventory reserve or the allowance for obsolete inventory. An offsetting debit will be made to an expense account.
When the asset is actually disposed of, the inventory account will be credited and the inventory reserve account will be debited to reduce both. This is useful in preserving the historical cost in the original inventory account.
Large, recurring inventory write-offs can indicate that a company has poor inventory management. The company may be purchasing excessive or duplicate inventory because it has lost track of certain items, or it is using existing inventory inefficiently. Companies that don’t want to admit to such problems may resort to dishonest techniques to reduce the apparent size of the obsolete or unusable inventory. These tactics may constitute inventory fraud.
Inventory Write-Off vs. Write-Down
If the inventory still has some fair market value, but its fair market value is found to be less than its book value, it will be written down instead of written off. When the market price of the inventory falls below its cost, accounting rules require that a company write down or reduce the reported value of the inventory on the financial statement to the market value.
The amount to be written down is the difference between the book value of the inventory and the amount of cash that the business can obtain by disposing of the inventory in the most optimal manner. Write-downs are reported in the same way as write-offs, but instead of debiting an inventory write-off expense account, an inventory write-down expense account is debited.
An inventory write-off (or write-down) should be recognized at once. The loss or reduction in value cannot be spread and recognized over multiple periods, as this would imply that there is some future benefit associated with the inventory item.
A couple of months ago, my steam account go hacked and my items were stolen. I managed to get my account back via verfy through payment. Whille my steam account was hacked, the hacker stole my TF2 items, which approximately were valued at 200$ spent on them. I managed to get the hacker trade banned through Steam Support. When I asked Steam Support for my items back, they denied me. I even wrote to Valve in an email about my items or a compensation of my money back. For those who think that I’m trying to scam and get free items or money, I can prove that I was hacked with a link to the hacker’s now trade-banned profile, his email and inventory history that verifies that he took what I said that he did. I feel really ripped off by Valve, who aren’t willing to even compensate for my loss or try to resolve the problem. What should I do?
Nothing but to take care of your steam account next time.
Scammed or stolen items are not returned.
Valve is not at fault for anyone falling for a scam or misbehaving with their account security and their item restoration policy is clear enough.
you will not get your items back, regardless of what you provide as information or that you are friends with the president of the poodle club.
Nothing but to take care of your steam account next time.
Scammed or stolen items are not returned.
Nothing but to take care of your steam account next time.
Scammed or stolen items are not returned.
Its not really my fault that I got hacked. How would I have prevented getting hacked? I had my firewall up and all my anti hack programs but still got hacked. That seems really unfair that scammed or stolen items aren’t returned. Valve got my 200$ and they are happy. and now I have basically two cents of the 200. Seems Fair
And you see there is a lot of ways to get your steam account “hijacked” either by the users ignorance for visiting phising site that using a fake steam login form, downloading and executing malware or using a compromised device.
The security on steam is bulletproof as long as the user is not being ignorant.
Introduction to Inventory and Cost of Goods Sold
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Inventory is merchandise purchased by merchandisers (retailers, wholesalers, distributors) for the purpose of being sold to customers. The cost of the merchandise purchased but not yet sold is reported in the account Inventory or Merchandise Inventory.
Inventory is reported as a current asset on the company’s balance sheet. Inventory is a significant asset that needs to be monitored closely. Too much inventory can result in cash flow problems, additional expenses (e.g., storage, insurance), and losses if the items become obsolete. Too little inventory can result in lost sales and lost customers.
Because of the cost principle, inventory is reported on the balance sheet at the amount paid to obtain (purchase) the merchandise, not at its selling price.
Inventory is also a significant asset of manufacturers. However, in order to simplify our explanation, we will focus on a retailer.
Cost of Goods Sold
Cost of goods sold is the cost of the merchandise that was sold to customers. The cost of goods sold is reported on the income statement when the sales revenues of the goods sold are reported.
A retailer’s cost of goods sold includes the cost from its supplier plus any additional costs necessary to get the merchandise into inventory and ready for sale. For example, let’s assume that Corner Shelf Bookstore purchases a college textbook from a publisher. If Corner Shelf’s cost from the publisher is $80 for the textbook plus $5 in shipping costs, Corner Shelf reports $85 in its Inventory account until the book is sold. When the book is sold, the $85 is removed from inventory and is reported as cost of goods sold on the income statement.
When Costs Change
If the publisher increases the selling prices of its books, the bookstore will have a higher cost for the next book it purchases from the publisher. Any books in the bookstore’s inventory will continue to be reported at their cost when purchased. For example, if the Corner Shelf Bookstore has on its shelf a book that had a cost of $85, Corner Shelf will continue to report the cost of that one book at its actual cost of $85 even if the same book now has a cost of $90. The cost principle will not allow an amount higher than cost to be included in inventory.
Let’s assume the Corner Shelf Bookstore had one book in inventory at the start of the year 2020 and at different times during 2020 purchased four identical books. During the year 2020 the cost of these books increased due to a paper shortage. The following chart shows the costs of the five books that have to be accounted for. It also assumes that none of the books has been sold as of December 31, 2020.
Special Feature: Review what you are learning by working the three interactive crossword puzzles dedicated to this topic. They are completely free. Inventory & Cost of Goods Sold Puzzles
Cost Flow Assumptions
If the Corner Shelf Bookstore sells only one of the five books, which cost should Corner Shelf report as the cost of goods sold? Should it select $85, $87, $89, $89, $90, or an average of the five amounts? A related question is which cost should Corner Shelf report as inventory on its balance sheet for the four books that have not been sold?
Accounting rules allow the bookstore to move the cost from inventory to the cost of goods sold by using one of three cost flows:
- First In, First Out (FIFO)
- Last In, First Out (LIFO)
Note that these are cost flow assumptions. This means that the order in which costs are removed from inventory can be different from the order in which the goods are physically removed from inventory. In other words, Corner Shelf could sell the book that was on hand at December 31, 2019 but could remove from inventory the $90 cost of the book purchased in December 2020 (if it elects the LIFO cost flow assumption).
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How to Adjust Entries for a Merchandise Inventory
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.
- Accounting for Inventory Write Downs
- How to Account for Inventory Write-off
- Accounting for Inventory Loss
- How to Record Inventory in Journal Entries on QuickBooks
- How to Activate Inventory on QuickBooks
- How to Describe the Temporary Accounts Used in the Periodic Inventory System
No matter how carefully your employees handle your inventory, sooner or later you will incur a loss from items being damaged. Under generally accepted accounting principles, you must write off the value of the damaged inventory shortly after the loss occurs. The way you disclose the amount depends on how frequently your business experiences a loss from damaged inventory. Since you can write off the loss on your financial statements and take a deduction on your business income tax return, you must keep accurate records on the value of the items written off.
Isolate Damaged Inventory
Inspect inventory when it arrives at your business to identify goods that might have been damaged in transit. At this point you can contact the supplier and return the damaged inventory for a full credit or refund. Once the inventory is in your warehouse, it can be damaged while in storage, incur damage on the production line or experience damage from your store customers. Employees should identify and remove damaged inventory whenever it is discovered and place it in a designated bin or area. A loss/damage report should be prepared for each damaged inventory item.
Value the Inventory
At the end of your accounting cycle, you should calculate the value of the damaged inventory so you can write off the loss. However, you do not value the inventory at its purchase price. Rather, the damaged inventory is valued at the lower of the fair market value or the purchase price. The fair market value is the current purchase price for the same inventory items. This amount may be lower than the inventory’s original purchase price. In this case, you must value the damaged inventory at the lower market cost instead of the higher purchase price.
Journalize the Loss
If large amounts of inventory flow through your business, you can set up an inventory contra account to record the value of the damaged inventory. You reduce the amount of inventory carried on the books each time you make an entry into the inventory contra account. At the end of the month, you write off the damaged inventory by debiting the cost of goods sold account and crediting the inventory contra account. However, if you infrequently have damaged inventory, you can debit the cost of goods sold account and credit the inventory account to write off the loss.
Income Statement Disclosure
If you occasionally write off small amounts of damaged inventory, you do not have to make a separate disclosure on the income statement. The loss is included in with the cost-of-goods-sold amount. However, large dollar amounts of inventory that are written off should be disclosed on your income statement. A separate account such as loss from write-off of Inventory is included with the other inventory accounts. The loss from write-off of Inventory account should appear on the income statement each time inventory is written off.
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Writing off inventory involves removing the cost of no-value inventory items from the accounting records. Inventory should be written off when it becomes obsolete or its market price has fallen to a level below the cost at which it is currently recorded in the accounting records. The amount to be written down should be the difference between the book value (cost) of the inventory and the amount of cash that the business can obtain by disposing of the inventory in the most optimal manner.
An alternative approach when specific inventory items have not yet been identified is to set up a reserve for inventory write offs. This is a contra account that is paired with the inventory account. When items are actually disposed of, the loss is charged against the reserve account. The result of this approach is a more rapid recognition of inventory write offs, which is a more conservative method of accounting. The amount stated in the contra account is an estimate of probable write offs, usually based on whatever historical write off percentage the company has experienced.
The accounting for the write off of inventory is usually a reduction in the inventory account, which is offset by a charge to the cost of goods sold account. If management wants to separately track the amount of inventory write offs over time, it is also acceptable to charge the amount to a separate inventory write offs account, rather than the cost of goods sold. In the latter case, the account is still rolled up into the cost of goods sold section of the income statement, so there is no difference in either approach at an aggregate level.
It is not acceptable to write off inventory at a future date, once you become aware of such an item, nor can you spread the expense over several periods. Doing so would imply that there is some future benefit associated with the inventory item, which is presumably not the case. Instead, the entire amount of the write off should be recognized at once.
A key point is that writing off inventory does not mean that you necessarily have to throw out the inventory at the same time. Instead, it may make sense to hold onto the inventory, in hopes that its value will increase over time. It may also be necessary to hold inventory for a short time, while the purchasing staff is finding the highest price at which it can be disposed of. However, inventory that has been written off should not be retained too long, if the result is an extra investment in inventory storage, or an overly cluttered warehouse area that interferes with normal warehousing activities.