Allowance to Reduce Inventory to LCM
What is Allowance to Reduce Inventory to LCM?
A valuation account used to decrease the value of depreciated inventory on the balance sheet.
![ari 17](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-17-1.jpg)
How it Works
A business will buy inventory.
![ari 2](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-2-1.jpg)
This inventory may lose value over time, due to changes in market price or obsolescence.
![ari 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-3.jpg)
To satisfy the principle of prudence or conservatism, you need to reduce your record of the inventory’s value.
![ari 4](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-4.jpg)
The reduced value is determined by a valuation method known as lower of cost or market.
![ari 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-5-1.jpg)
Once determined, you record the value in the allowance to reduce inventory to LCM account.
![ari 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-6-1.jpg)
This account is a separate account attached to the inventory account.
![ari 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-7-1.jpg)
When updated, its balance will reduce that of the inventory account.
![ari 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-8-1.jpg)
As such, it is classified as a valuation account..
![ari 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-9-1.jpg)
The account is also classified as a contra asset account.
![ari 10](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-10-1.jpg)
Most asset accounts balance on the debit side.
![ari 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-11-1.jpg)
However, the allowance to reduce inventory to LCM account balances on the credit side.
![ari 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-12-1.jpg)
When recording the transaction, you credit the contra account.
![ari 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-13-1.jpg)
This shows you are effectively taking value from the inventory account.
![ari 14](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-14-1.jpg)
After this, you debit the loss an inventory write down account.
![ari 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-15-1.jpg)
This shows the value was designated as an expense.
![ari 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-16-1.jpg)
Once updated, the accounts will show that inventory has lost value and that loss of value is designated as an expense.
![ari 17](https://seeaccountingnow.online/wp-content/uploads/2021/08/ari-17-1.jpg)
© R.J. Hickman 2020