What is Contra Inventory Account

Contra Inventory Account has a Credit balance which is unusual or negative balance as Inventory has normal debit balance. It is due to the obsolence or damaged of inventory or merchandise.

The journal entry to record contra inventory account may be as shown below:

Damaged / Obsolete Inventory a/c  XXX

                                 Provision / Allowance For Damaged / Obsolete Inventory a/c  XXX

For Example, if the net realizable value of inventory is Rs. 10000 for the accounting period. During the period, the market value of inventory is reduced to Rs. 7000. now there is loss of Rs. 3000 to the company’s business. The Company would record the following entry as shown below:

                            Obsolete Inventory a/c  3000

                                                                Allowance for Obsolete Inventory a/c  3000

                                                  (Inventory Obsoleted For The Period)

Damaged / Obsolete Inventory is a loss to the business so it is recorded in Income Statement as an Expense while provision or allowance for obsolete / damaged inventory is a contra inventory account which is deducted from the closing balance of inventory on Balance Sheet.