What do you mean by Obsolete Stock ? - YouTube

What do you mean by obsolete stock?

The term obsolete means something  which is no longer useful. Similarly,  

obsolete stock refers to the inventory that  has lost its original value either because  

it has become old and has  been in use for a long time.  

It has become outdated and better options are  available to replace it. It also refers to the  

stock which is no longer in demand in the market  because it has reached the end of its life cycle. 

What does obsolete stock mean for a company,  and how are obsolete stocks calculated?

Having large quantities of  obsolete stock in a company's  

warehouses is not considered a positive  sign. Usually, those companies or businesses  

are left with large quantities of obsolete  stock which have either failed to understand  

a decline in demand or ignored the company's stock  replenishment policies for a long time. Therefore,  

it is good to eliminate obsolete stock. If  this is not done, these stocks are mentioned  

in a company's balance sheet as working capital  with a limited return on investment. Therefore,  

it is necessary to write off these stocks as  otherwise they would create an illusion and be  

considered assets. Obsolete stock is also referred  to as 'dead inventory' or 'excess inventory'.

Inventory or stock refers to the goods  and materials held by a business that is  

ready to be sold. Stocks are  assets of a business operation,  

as they account for a huge percentage  of a company's sales revenues.

Earlier, when the technology was not  developed, stocks were considered  

obsolete if the goods and materials were held for  too long. However, with technological innovations,  

an increase in options available to the customers  

and their high expectations have changed. As  of now, the life cycle of the products has  

become shorter, and stocks have become  obsolete much faster than the earlier times.  

It is a fact that when a business person fails  to sell a particular good and material to the  

customers for a long time, it means that the  value of that stock has considerably declined,  

and it is now of no use for the company.  Therefore, timely recognition of this  

fall in the value of a particular stock  is important for a business operation,  

and the company should write  off the obsolete stock in its  

financial statements as per the Generally  Accepted Accounting Principles (GAAP).  

What are the implications  of the inventory write-down?

Write-off reduces the value of the Inventory.

In the case of accrual  accounting, there are chances  

that the management may choose  to make an inventory reserve  

account to compensate for the future losses  because of the change in inventory valuation.

Write-off affects the Cost of  Goods Sold for a given period. 

It has a significant impact on a company's balance  sheet. This is because any change in the value  

of stocks will ultimately affect  the profitability of a business.

How can a business keep a tap on obsolete stocks?

One way to reduce obsolete stocks is by tracking  

the products based on their life  cycle. Once a product becomes obsolete,  

it is next to impossible to provide you with  any profitable return on investment. Therefore,  

it is important to carefully monitor when a  product's sales begin to hit a downward trend  

and thereby make changes in the reordering  parameters to match the demand in the market. 

Further, if one finds an excess stock of  certain goods, efforts must be made to  

accelerate the sale of the concerned goods  or products before they become obsolete.  

Companies can avoid obsolete inventory  if they have good inventory policies and  

better understand the consumer's  behaviour and demand.