Question

how does depreciation affect inventory in a business ?

Answer 1

DEPRECIATION HAVE NO DIRECT AFFECT ON THE INVENTORY. DEPRECIATION IS CHARGED ON THE FIXED ASSETS AND INVENTORY IS NOT A FIXED ASSET AS IT HELD FOR THE PURPOSE ON SALE AND CONVERTED TO CASH. INVENTORY IS HELD TO GENERATE PROFITS THROUGH SALE AND THAT EARNED PROFIT IS AFFECTED BY THE DEPRECIATION. DEPRECIATION ON THE FIXED ASSET IS REDUCED FROM THE PROFIT AS AN NON CASH NON OPERATING EXPENSE. THUS THIS IS THE INDIRECT WAY IN WHICH THE DEPRECIATION AFFECTS THE INVENTORY IN THE BUSINESS.

"WRITING DOWN" HAS AN DIRECT IMPACT ON THE INVENTORY OF THE BUSINESS. THE PROCESS OF DEVALUING THE INVENTORY IS CALLED AS WRITING DOWN. WRITING DOWN AND DEPRECIATION ARE TWO DIFFERENT TERMS. DEPRECIATION ACCUMULATE OVER TIME AND WRITE DOWN DOES NOT ACCUMULATE OVER TIME, IT IS REDUCED FROM THE VALUE OF THE INVENTORY AS SOON AS WE RECOGNIZE THE LOST VALUE.

WRITE DOWN SOLVE THE SAME PURPOSE AS DEPRECIATION BUT IT CAN ONLY BE CHARGED WHEN-

• INVENTORY IS LOST DUE TO THEFT
• GOODS ARE DAMAGED AND THE VALUE IS LESS THAN COST.
• GOOD WHICH ARE NOT SALABLE

LIKE DEPRECIATION, WRITE DOWN GIVE THE REAL WORTH OF THE INVENTORY. IF WE NEED TO DISPOSE OF CERTAIN ITEMS. WE CAN CRATE AN OBSOLETE INVENTORY LINE ITEM ON THE BALANCE SHEET. THIS REDUCES THE VALUE OF INVENTORY. WHEN OBSOLETE INVENTORY IS DISPOSED OFF THE ENTRY IS BALANCE SHEET IS REMOVED OR ELSE CREDIT THE AMOUNT LOST TO COST OF GOODS SOLD OR TO INVENTORY WRITE DOWN ACCOUNT.