Accounting Treatment For Increase or (Decrease) of Provision For Stock Obsolescence(Part 6)

INCREASE IN PROVISION FOR STOCK OBSOLESCENCE:

Assuming a provision for Stock Obsolescence of $100,000 is created at Quarter 1. At end of Quarter 2, you have re-done the provision and noted that you need increase a further amount of $50,000. How should we treat this increase in provision?

For Quarter,

Let’s us have the Original Entry:

Debit : Provision for Stock Obsolescence ( Income Statement)      100,000

Credit: Provision for Stock Obsolescence ( Balance Sheet)                        100,000

Being creation of provision for Stock Obsolescence at Quarter 1.

In Quarter 2,

We increase the provision by an additional  $50,000 namely:-

Debit: Provision for Stock Obsolescence ( Income Statement)         50,000

Credit: Provision for Stock Obsolescence ( Balance Sheet)                          50,000

Being further increase in provision for Stock Obsolescence at Quarter 2

Let’s look at the impact from the Income Statement:-

For Quarter 2, Profit is lowered by $50,000

For Year To Date Quarter 2 : Profit is lowered by $100,000+$50,000 =$150,000

From the Balance Sheet :-

At Quarter 1:

Stock                      $500,000 ( say)

Less:

Provision for Stock Obsolescence  (100,000)

Net Stock               $400,000

At Quarter 2:

Stock                      $500,000 ( say)

Less:

Provision for Stock Obsolescence  (150,000) ( $100,000+50,000)

Net Stock               $350,000

(DECREASE) IN STOCK OBSOLESCENCES:

Assuming the same   $100,000 was created as provision for Stock Obsolescence in Quarter 1. In quarter 2, some of the stock from this provision amounted to $80,000 manage to be sold off. How should we treat this reduction?

Original Entry (Quarter 1):

Debit : Provision for Stock Obsolescence ( Income Statement)      100,000

Credit: Provision for Stock Obsolescence ( Balance Sheet)                        100,000

In Quarter 2,

We reduce the provision by $80,000 namely:-

Debit: Bank                                                                  80,000

Credit: Provision for Stock Obsolescence ( Income Statement)       80,000

By doing so,

Let’s look at the impact from the Income Statement:-

For Quarter 2, Profit is higher  by $80,000

For Year To Date Quarter 2 : the “net”  Profit is $100,000-$80,000 =$20,000

From the Balance Sheet :-

At Quarter 1:

Stock                      $500,000 ( say)

Less:

Provision for Stock Obsolescence  (100,000)

Net Stock               $400,000

At Quarter 2:

Stock                      $500,000 ( say)

Less:

Provision for Stock Obsolescence   (20,000) ( $100,000-80,000)

Net Stock               $480,000