Final answer:
At the end of January, to record the adjusting entry for a decrease in estimated selling price of inventory, a loss would be debited and inventory credited by the amount of the loss due to the new estimated selling price of, for example, $100 per unit.
Step-by-step explanation:
At the end of January, a company may need to record an adjusting entry for inventory if the estimated selling price has decreased. This scenario implies the inventory may be impaired, or its value on the market has dropped since its initial valuation. In such cases, companies often use the lower of cost or market (LCM) rule for valuing inventory. If the cost to purchase inventory is higher than what it can be sold for, an adjustment is needed to reflect the new estimated sale price of the items.
To record the adjusting entry, the company should recognize a loss in the value of inventory through an accounting adjustment. For example, if the inventory was originally valued at more than $100 per unit, and the new estimated selling price is $100 per unit, the company needs to adjust the inventory value on the balance sheet downwards to match this new expected sales price.
The adjusting entry would typically look like this (assuming the cost was higher than $100):
- Debit a loss account (e.g., loss on inventory valuation): [Amount of the loss]
- Credit Inventory: [Amount of the loss]
It is important to note that the exact names of the accounts might vary depending on the company's accounting practices. The loss account could be named 'Loss on Inventory Write-down' or similar, and it will reflect the decrease in expected revenue due to the reduced estimated selling price of inventory at the end of January.