Recording obsolete stock in your accounting system

Identifying and recording obsolete trading stock write-offs for a small business involves several steps.

Its that time of year, when you should undertake you annual stock take. We suggest to be practical in your approach. Use scales and estimates for small items such as screws , widgets and small items.

A practical approach – obsolete items.

Here’s a general guide on how to approach this process:

1. Identify the stock items: Review your inventory records to identify any obsolete trading stock that needs to be written off. Look for items that are damaged, expired, obsolete, or otherwise unsellable.
2. When doing a stocktake, use round stickers (e.g., red dots) or straws to mark the items you have counted.
3. Assess the value: Determine the value of the stock items that need to be written off. This can be done by assessing their original purchase cost, current market value (if applicable), or any other relevant valuation method.
4. Document the write-off: Maintain proper documentation for the write-off. This should include details such as the date, description, quantity, unit cost, and total value of the stock items being written off. Store this information for future reference, especially for tax and audit purposes.
5. Update inventory records: reflect the write-off. This helps ensure accurate reporting and tracking of your remaining stock items.
6. Tax considerations: See Geoff and his team

Remember, if need help contact us . 

So why is it obsolete stock? As you write the stock off, take a moment to consider why. Often the decision to dump a stock line is a decision after several years of goods not moving. It could be that you misjudged the market, the product was faulty, or it has been superseded by better technology. Does the stock go into a landfill or can it be donated to a worthwhile charity such as Rotary Goods in Kind?

Obsolete stock (also called dead stock or obsolete inventory) happens when goods in your inventory can no longer be sold or used for their intended purpose. Here’s how it usually occurs:

1. Changes in Demand by customers

This is the number one reason why stock ends up being written off

• Customer preferences shift — for example, a café stops selling a once-popular menu item because tastes have changed.

• Seasonal or fashion trends end, leaving you with unsellable leftovers (e.g., Christmas-themed packaging in February).

Another problem is not getting the stock in time. I’e. Importing summer umbrellas that arrive at the end of summer.

2. Overstocking and Poor Forecasting

Don’t be guilty of stockpiling. The more stock on the shelf, the more money you have tied up

• Ordering too much stock based on overly optimistic sales forecasts.

• Not tracking sales data or reorder points closely enough, leading to excess inventory that ages on shelves.

3.Product or Technology Updates

• When a product is superseded by a new version, the older model becomes obsolete. Sometimes they need to be removed as the cost of holding parts for these models becomes too expensive.

• Common in electronics, software, and parts industries, but it also happens with packaging or branding changes.

4. Stock damaged

A final reason stock is written off is that the product packaging is damaged or the package has incorrect or old promotions that don’t exist. You can see this often in supermarkets after a supplier has a competition that has subsequently finished

You should combine your stocktake with a sales budget for the coming year. Managing stock takes time and strategy. 

Once you have undertaken your list, let us know and we will help you record it in your accounting system—happy new financial year.