Financial Planning

Inventory Reserve: What Is It, How It Works, Purpose, and Usage

Inventory Reserve

Whether it is a big company or a small one, a successful company or a not-so-successful one, all face a situation where all the inventories are not sold. Some percentages of the inventory go bad or become obsolete for all. The inventory reserve of the business is and accounting technique and is also the estimate of the percentage of inventory that is unsold.

The inventory reserve plays a big role in correctly valuing the inventory of the company. Hence, this also helps present a full picture of the company’s health, financial worth, and flexibility.

In this article, you will learn about inventory reserve and how it works in the process of accounting. Apart from that, we will also explain the use of inventory reserve in accounting. Finally, we will show you the process of accounting for the inventory reserve of a business.

What Is An Inventory Reserve?

According to Investopedia,

“An inventory reserve is a contra asset account on a company’s balance sheet made in anticipation of inventory that will not be able to be sold. Every year, a company has an inventory that will not be able to be sold for various reasons. It may spoil, fall out of fashion, or become technologically obsolete. In anticipation of this, the company will create an entry on the balance sheet called inventory reserve.”

The inventory reserve portion in the balance sheet consists of the company’s prediction of the inventory that will not be sold that year. While the company counts its inventory as an asset, it considers its inventory reserve as a contra asset. This is because the latter reduces the net amount of inventory assets of the company.

The company creates the inventory reserve as an estimate of the company’s future inventory spoilage. The company brings out this estimation based on its past experiences. Furthermore, once the company identifies an inventory that it’s unable to sell, it writes it down as an official recognition of the loss.

Business managers of an organization use these data from previous years’ inventory information. Hence, based on this, they make a judgment and decide on the size of the inventory reserve.

What Is The Use Of An Inventory Reserve In Accounting?

In general, businesses want to get an accurate picture of their inventory position. Hence, they try to estimate the amount of inventory that is not to be sold from the end of the company. This inventory which the company has written off is called the inventory reserve of the company. The accountant includes this data in the balance sheet.

According to NetSuite.com,

“Companies own raw materials, partially completed products, and finished goods. These items are all included in a company’s gross inventory. Business managers know that not all of their raw materials will be used, and not all of their finished goods will be sold. That reserve is deducted from the value of gross inventories to arrive at the company’s net inventory position. Net inventory is typically what appears on a company’s balance sheet.”

During the accounting process, the business considers its inventory reserve as a “contra” asset in its balance sheet. This is because this amount actually reduces the gross inventory value to arrive at the company’s net inventory value.

Since inventory accounts come naturally with a debit balance, as debit increases in the balance sheet, the inventory account value increases. On the other hand, inventory reserves, like contra-asset accounts, come with natural credit balances. Hence, the latter serves to reduce the value of the assets.

How Does An Inventory Reserve Work?

Indeed.com explains –

“An inventory reserve in accounting is an entry on a business’s balance sheet that anticipates the company’s unsold inventory. Accountants consider inventory as an asset on their balance sheet. An asset is any item or resource that a company owns and has the potential to generate economic value, such as revenue.”

Inventory also falls under this asset category. Also, as per the need for good accounting principles, businesses need to report their assets in such a way that they are close to their actual value. Hence, if a business wants to calculate the net value of its inventory, it needs to account for the loss of inventory and make it an estimate.

As per Generally Accepted Accounting Principles (GAAP), an inventory reserve is a part of inventory accounting. If a business wants to track its inventory reserve, it will thus be able to make an accurate representation of its assets on the balance sheet. The usefulness of an asset is only when it has a future value to the business.

There is always a part of the inventory of a company that remains unsold every year. Hence, the company decides not to include the entire inventory amount as an asset on the balance sheet.

To create an accurate value, the company subtracts the inventory contra asset account value from the inventory asset entry. The resulting value is the estimate that the company will sell to create value for the business. If the company does not include the inventory reserve entry, the company will end up overstating the value of its assets.

Accounting For Inventory Reserves: Special Considerations

According to GAAP standards (which is the industry standard for accounting), inventory reserve is a conservative methodology for entry. This is because the company’s attempt, in this case, is to predict the losses for the inventory even before the company has confirmed the loss.

In general, inventories consist of goods with future value for the company. Hence, these goods are called assets. However, according to conservative accounting principles, it is important to report assets close to their current value. Hence, it gets easier for the company to make estimations.

Summing Up

Hope this article was helpful for you in getting a better understanding of how an inventory reserve works with accounting. You can see from here that it is important for the company to consider inventory reserve as a contra asset. This helps the company to get an accurate representation of the assets that it will sell in the future.

Do you have more information to add regarding inventory reserve? Consider sharing with us in the comments section below.

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Soumava Goswami

Inspired by The Social Network, Soumava loves to find ways to make small businesses successful – he spends most of his time analyzing case studies of successful small businesses. With 5+ years of experience in flourishing with a small MarTech company, he knows countless tricks that work in favor of small businesses. His keen interest in finance is what fuels his passion for giving the best advice for small business operations. He loves to invest his time familiarizing himself with the latest business trends and brainstorming ways to apply them. From handling customer feedback to making the right business decisions, you’ll find all the answers with him!

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It implies that your loan value will be greater as well.   However, the banks that grant INR 20000 as the threshold eligible salary for credit, will not consider INR 15000 as threshold.   For instance, IDFC First Bank gives loan against a minimum salary of INR 20000.  But there are no schemes that can get you a loan if you have INR 15000 salary.   Moreover, there are differences in credit worthiness of the two individuals. In simple terms:  An individual with INR 15000 salary may get up to INR 1500000 as loan.   An individual with INR 20000 salary may get up to INR 2500000 as loan. Benefits of taking a navi loan minimum salary The navi loan minimum salary is INR 15000. But it may be higher if your credit performance is not good. Ideally, you must have a credit score of 650 with a minimum salary of INR 15000.   If you wish to take loan against this threshold criteria, you may get the following benefits:  No collateral against the credit line/loan that you get. The repayment tenure might span up to 5 years. You might have to pay slightly more interest, but you may get a favorable EMI breakdown.  You can get your credit line from Navi, immediately approved. You can do KYC and documentation prior to approval online, in minutes. If your loan is around INR 15000, it will take almost no time to be disbursed.  As there are no collaterals, there are no instances of validation, once KYC is done.  You may get a small credit line against minimum salary, but you can pay back and get a higher credit line.  No concealed charges are applicable, as you get to know the final repayment value, before you sign the disbursal letter. Other miscellaneous eligibility criteria applicable You must have a fixed salary from an acceptable source. However, you can be self-employed as well. For instance, you may run a coaching center. Mostly navi loan minimum salary comes with the criteria of 1-2 years of minimum work experience.  Lastly, navi loan minimum salary is INR 15000, only when you are 23 years of age at the least.   There are no hidden clauses. If you meet the two main criteria (min salary of 15000 and 650 credit score), you will get a loan easily. How To Apply For Navi Personal Loan? – Steps To Follow Once you are okay with the essential features associated with Navi personal loans, you will need to apply for a personal loan from the Navi app. Here are the steps you need to follow to apply for a personal loan from Navi: Step 1: Go to Play Store or App Store, and download the Navi personal loan app. Install the app on your Android phone or iPhone. Step 2: Register your mobile number on the Navi server through your app. Step 3: Check the eligibility of the loan, and fill in your personal details through the app. Step 4: On the app, go to the next page, and select the loan amount and the EMI amount. Step 5: Once you have the amount, you need to complete the KYC process, where you need to produce your Aadhar and PAN numbers and upload a selfie of yourself. Step 6: Enter your bank account details which are needed for the transfer of money. Step 7: Apply for the loan. Once your loan is verified, you will get your loan fast. The money will be transferred to your amount within the time specified to you. Is Navi Approved BY RBI? Now many people ask whether Navi is approved by RBI or not. Then, in this case, the Navi official website claims, “RBI does not approve digital lending apps. The Navi App is operated by Navi Technologies Limited. Navi Finserv Limited is an RBI registered Systemically Important Non-Deposit Taking NBFC (ND-SI) which lends through the Navi App. Navi Technologies is the digital lending partner of Navi Finserv.” Frequently Asked Questions!!! (FAQ): Q1. Does NAVI Provide A Personal Loan?    Ans: Navi offers personal loans for attractive interest rates that start from 9.9% with some flexible EMI options upto 72 months. You need to get through the right options that can assist you in attaining your requirements with complete ease. Q2. Is Navi Loan Real Or Fake? Ans: NAVI loan is a legit application that offers you health insurance services as per your requirement. You have to get through the complete process that can make things easier for you to attain your requirements with complete clarity. Q3. Is Navi Personal Loan Approved By RBI? Ans: Yes!! Navi personal loan is approved by RBI. You have to get through the complete process that can make things easier and effective for your business in the correct order. You should follow the right process that can make things easier for you to get the loan on time. Q4. Who Is Eligible For Loan? Ans: If your age bracket is between 18-45 years then you are eligible for the Navi Loans. You have to get through the complete loan process can make things easier for you to get the loans on time. Try to figure out the reasons for getting or not getting the loans. Q5. What Is The Minimum Salary For Navi Loan? Ans: You need to be an Indian citizen within a period of 21-65 years. You cannot make your selection and choices in the incorrect end. You need to have 3 lakhs of money as your salary. Summing Up Hope this article was helpful for you in getting a comprehensive idea of what to expect from Navi personal loans. If you are looking for a quick personal loan, you can apply for one through the Navi app; however, as you have seen that the rate of interest can change as per the loan amount and the applicant's details. Do you know of any other app that offers similar loan rates? Share your answers in the comments section below. Read More: What Is SHLL? Is SHLL Stock A Good Stock To Buy In Future? SBE Stock – Present Price, Forecast, Statistics – Should You Invest? 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