Modelling Inventory Write-Offs

There are 2 main ways of modelling reductions in the value of inventory:

• direct write-off via an Inventory element
• indirect write-off via a Provision element

Direct write-off via an Inventory element

This method reduces the value of a specific inventory element in the Balance Sheet and adds an Obsolete Stock expense to the Profit & Loss. Taxable income is reduced by the obsolete stock expense.

To write inventory off directly:

• go to Forecast > Element settings and click on the Inventory element

• under Purchases, select an Inventory Write Off Method:
• Enter Write Off
• % of Monthly Purchases
• % of Closing Inventory Balance
  

• Enter write-off data into the data entry row that appears 

Indirect write-off via a Provision element

This method achieves an inventory write-off in 2 steps:

1. Provision: a Provision for Obsolete Stock is created in the balance sheet and a Provision expense is added to the Profit & Loss
2. Write-off: the write-off is recorded by reducing both the Inventory value and the Provision value in the balance sheet, with no effect on the Profit & Loss

To write inventory off indirectly:

1. Add a Provision element under Current Liabilities in the Castaway Chart of Accounts
2. Click on the Provision element to enter the Data Entry work area
3. Under Account Type, set the Account Type to General Inventory Writedown
   
   
   
   
4. From New Provision, set the Provision Movement Option
5. From the Write Off tab, set the Write Off Method
6. Enter the appropriate data into the data entry rows that appear