Financial Accounting &

Analysis
Accounting estimates: Useful life of non-
current assets, Impairment of non-current
assets, Bad debts, Provision for obsolete
and slow-moving stock, Revalued amounts
of non-current assets, Provision for pension
benefits, Depreciation.
(Financial Accounting & Analysis)

(Provision for obsolete and slow-moving stock)

This topic will teach you about Provision for obsolete and slow-moving stock

Learning Objectives

At the end of this topic, you will be able to:

Understand What are bad debts
Identify the two methods of recognizing bad debts
Develop an understanding of the provisions of law
Understand the treatment of Recovery of Bad Debts
Understand the allowance of bad debts allowed for banks and
financial institutions
Understand the Treatment as per Accounting Standard
Understand the Accounting Treatment
Identify the Methods for Estimating Bad Debt
(Financial Accounting & Analysis)

(Provision for obsolete and slow-moving stock)

Obsolete inventory
Obsolete inventory is a term that refers to inventory that is at the end of its product life cycle. This inventory has
not been sold or used for a long period of time and is not expected to be sold in the future. This type of
inventory has to be written-down or written-off and can cause large losses for a company.

Obsolete inventory is also referred to as dead inventory or excess inventory.

Inventory refers to the goods and materials in a company’s possession that are ready to be sold. It is one of the
most important assets of a business operation, as it accounts for a huge percentage of a sales company’s
revenues.

Earlier, if the inventory was held for too long, the goods may have reached the end of their product life and
become obsolete. However, now with improvement in technology, the state of abundance, and customers' high
expectations, the product life cycle has become shorter and inventory becomes obsolete much faster.

Obsolete inventory is inventory that a company still has on hand after it should have been sold. When inventory
can’t be sold in the markets, it declines significantly in value and could be deemed useless to the company. To
recognize the fall in value, obsolete inventory must be written-down or written-off in the financial statements in
accordance with generally accepted accounting principles (GAAP).
(Financial Accounting & Analysis)

(Provision for obsolete and slow-moving stock)

Obsolete inventory
Obsolete inventory is a term that refers to inventory that is at the end of its product life cycle. This inventory has
not been sold or used for a long period of time and is not expected to be sold in the future. This type of
inventory has to be written-down or written-off and can cause large losses for a company.

Obsolete inventory is also referred to as dead inventory or excess inventory.

Inventory refers to the goods and materials in a company’s possession that are ready to be sold. It is one of the
most important assets of a business operation, as it accounts for a huge percentage of a sales company’s
revenues.

In the past, if the inventory was held for too long, the goods may have reached the end of their product life and
become obsolete. Currently, with technology, the state of abundance, and customers' high expectations, the
product life cycle has become shorter and inventory becomes obsolete much faster.

Obsolete inventory is inventory that a company still has on hand after it should have been sold. When inventory
can’t be sold in the markets, it declines significantly in value and could be deemed useless to the company. To
recognize the fall in value, obsolete inventory must be written-down or written-off in the financial statements in
accordance with generally accepted accounting principles (GAAP).
 (Financial Accounting & Analysis)

(Provision for obsolete and slow-moving stock)

Summary
In this topic, you learnt:
Understood What are bad debts – receivable which customer will not pay, due to credit
offered, can happen due to inability to pay or fraud.
Identified the two methods of recognizing bad debts – direct write-off and allowance
method
Developed an understanding of the provisions of law - relevant section of Income Tax
Act discussed.
Understood the treatment of Recovery of Bad Debts – to be treated as income if earlier
bad debt deduction claimed
Understood the allowance of bad debts allowed for banks and financial institutions –
only banks and financial institutions allowed to claim deduction for provision that too
for certain percentage
Understood the Treatment as per Accounting Standard – provision to be accounted,
deferred tax asset/liability creation
Understood the Accounting Treatment - 2 methods-direct write off and allowance, the
journal entries for same discussed