Final answer:
To adjust for a loss in inventory value using the Allowance Method, estimate the decreased value and record an adjusting entry that debits a loss account and credits an allowance for inventory contra account.
Step-by-step explanation:
To adjust for a loss in value of inventory using the Allowance Method, a company makes an accounting entry that decreases the value of the inventory on the balance sheet to reflect its reduced worth. The process involves two main steps:
- Estimating the depreciated value of the inventory by assessing market conditions, potential obsolescence, or damage. This involves determining the amount the inventory has lost in value.
- Recording an adjusting journal entry to reflect the decreased value. This entry debits a loss account, such as "Loss on Inventory Write-down" and credits an allowance account, such as "Allowance for Inventory Obsolescence", which is a contra asset account used to show the reduced value of the inventory on the balance sheet.
The entry does not immediately impact the Income Statement, as the loss will be realized when the inventory is either sold or disposed of. This method helps in better matching expenses with revenues.