For Accounting purpose, how do we treat a reduction of the value of stock

March 1st, 2011 Comments off
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If, at the end of an accounting period, stocks whether it is raw materials, work-in-progress or finished goods are known to be worthless ( may be due to technology changes, no demand,etc) or worth less than their orginal cost, the value of the stocks should be written down to: 

  • ZERO if they are worthless ; or
  • Their Net Realizable value if this is less than their original cost.

What it means that the loss is reported as soon as it is foreseen. Such stocks needs to be scrapped and thrown away or to be sold off at cheaper price. This is an application of the Prudence Concept.

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Financial Accounting

 
 

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