Markdown of goods: why it is necessary and when to do it

The concept of markdowns of goods (inventory) is known to everyone: both sellers and buyers. For many people, discounted goods = spoiled but cheap. Is it really so? Let's find out.

When do I need to mark down goods?

In order to understand how to properly value the goods, reduce the price or write them off, it is necessary to first of all study the Regulation on Accounting Standard No. 9 "Inventories" (NAS No. 9).

When goods are purchased or manufactured, they are recognized on the balance sheet at cost, and subsequently accounted for at the lower of cost or value:

1. At historical cost (this includes the costs of acquiring, exchanging, processing and delivering the goods to the place of use, as well as bringing the goods to a condition in which they will be suitable for use for the intended purposes).
2. At net realizable value (the expected selling price of the goods less the costs of completion and sale).

This is how all inventories should be valued: finished goods, materials and raw materials for production, and goods that the company acquires for further sale.

Inventories should be valued at net realizable value if:

• the price of the goods has decreased;
• the goods have deteriorated;
• the product is outdated;
• the goods have lost their original economic benefit for other reasons.

Goods should be depreciated when, as of the balance sheet date (the date on which the company's balance sheet is prepared, usually the last day of the reporting period), it turns out that the original cost of inventories exceeds their net realizable value.

Net realizable value = estimated selling price - (estimated costs of completion + costs of distribution).

This formula should be used to value each unit of goods (inventory). An example of the calculation can be found in the Methodological Recommendations on Inventory Accounting No. 2 dated January 10, 2007 in Appendix No. 2.

How do I mark down a product?

Markdown of goods is not as simple as it seems at first glance. It consists of several stages:
Stage 1. The manager approves:

• composition of the commission for markdown;
• frequency of reviews for markdowns.

Stage 2. Commission:

• creates a list of goods that require a price reduction;
• can conduct an inventory of stocks and document its results.

Stage 3. Leader:

• approves the list of goods requiring a price reduction;
• decides on the markdown.

Stage 4. The Commission and materially responsible persons draw up and sign the Act of markdown.
Stage 5. The manager approves the markdown act.
Stage 6. Retailers are relabeling prices.
Stage 7. The results of the markdown are recognized in the accounting.

Let's now take a closer look at what documents you need to draw up if the price of goods decreases:

1. An order from the manager to create a commission to mark down inventory. The commission should include employees who are knowledgeable about the goods and know the requirements for quality and storage conditions. The order should also specify the frequency of inspection of goods for damage and subsequent markdown. Often, such inspections coincide with an inventory.
2. The list of goods subject to markdown is approved by the manager. It includes the name of the goods, quantity, original and retail price, information about the manufacturer, and suggestions for the amount of the markdown.
3. A manager's order to mark down goods.
4. Act of markdown of goods to net realizable value (see above for the calculation formula). Such an act can be drawn up in any form, the main thing is to indicate for each item of goods: quantity, cost before and after markdown, and the amount of markdown.

Rules for relabeling prices in retail trade

After the commission has marked down the goods, it is necessary to change the retail prices for the goods in the store. The rules for such relabeling are set out in the Instruction on the Procedure for Marking Retail Prices for Consumer Goods in Retail and Restaurant Businesses.

After markdown, prices must be relabeled by crossing out the previous price and indicating the new price on price tags, product labels, labels, packaging, etc. on each item of goods. Such changes must be confirmed by the signature of the employee responsible for setting, forming and applying the price.

If the old price cannot be crossed out, then the new price must be pasted on top of the old price.

For goods that have been reduced in price due to a partial loss of quality, the letter "P" should be placed on new labels and price tags.

In the salesrooms, it is also necessary to post announcements of new prices that will remain in effect until the last of such goods is sold.

Read about the rules for designing price tags in the article "What to put on a price tag?".

We wrote about how to revalue goods in Torgsoft in our article "Revaluation of goods"

How to show markdowns in accounting?

According to clause 27 of NAS No. 9, the amount of inventory depreciation should be written off as an expense of the reporting period, i.e. in the period in which the depreciation was made.

If retailers account for goods at selling prices, then if the price of the goods is reduced to net realizable value, the amount of the markdown must be divided by the:

• the amount by which the trading margin is reduced;
• the amount by which the original cost of the goods is reduced.