Contra Inventory Account

A contra inventory account is a type of contra account that is paired with Inventory but carries a credit balance, reducing inventory to the amount reported on the balance sheet. The most common example is an allowance to reduce inventory to net realizable value, used when goods are damaged, obsolete or selling for less than they cost. If inventory cost $200,000 but can be sold for only $185,000 after selling costs, the company debits a loss or cost of goods sold and credits the allowance $15,000, so the inventory appears at $185,000 while the cost records stay intact. This applies the rule of lower of cost or net realizable value, and US GAAP does not permit such a write-down to be reversed in a later year. A LIFO reserve, which adjusts FIFO inventory records to LIFO, works in a similar way. Also see Contra Account.