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in this video im going to show you how to use an allowance account for inventory write-downs so lets say youve got some inventory that originally cost 500 and the net realizable value of the inventory is 380. so assuming were using the lower cost or net realizable value rule theres gonna be a 120 write down now ive talked about in another video theres a couple ways you can account for that one way is to debit cost of goods sold and then credit inventory another way is instead of debiting cost of goods sold credit like loss on decline in value of inventory and then credit inventory i dont want to get into that here lets just stick with a simple one we debit cogs and we credit inventory now an allowance account what were going to do is instead of crediting inventory directly were going to credit an allowance account which is then subtracted from inventory on the balance sheet its like a contra account so our journal entry would look like this okay so were still debiting cost
