The provision for inventory depreciation is at the end of the mid-term or the end of the year. If the inventory is damaged, completely or partially obsolete or the sales price is lower than the cost, the unrecoverable part of the inventory cost should be extracted according to the difference between the cost of a single inventory item and its net realizable value, and included in the inventory depreciation loss. Simply put, the net realizable value of inventory is lower than the original cost, and the reduced part is dealt with steadily.

Notice on Issues Concerning Income Tax Needed to Be Clear in Implementing Accounting System for Enterprises (Guo Shui Fa [2003] No.45) stipulates that the inventory of an enterprise shall be measured at the end of the period according to the lower of cost and net realizable value, and the inventory depreciation reserve shall be accrued for the difference between net realizable value and inventory cost. Inventory depreciation reserve shall be accrued according to individual inventory items, and in some cases, it may also be accrued according to inventory categories.

Extended data:

Precautions:

1, the inventory depreciation reserve shall be measured according to the cost and net realizable value of a single inventory item, and the inventory depreciation reserve shall be accrued for the part whose net realizable value is lower than the book cost (value) of the inventory. The inventory depreciation reserve that should be accrued in the current period is equal to the difference between the net realizable value of inventory at the end of the current period which is lower than the inventory cost and the credit balance of the inventory depreciation reserve account before the depreciation reserve is withdrawn.

2. Net realizable value refers to the value of an enterprise after deducting the estimated completion cost and estimated expenses necessary for sales from the estimated selling price in the normal operation process. Enterprises should re-determine the net realizable value of inventories every period.

3. When determining the net realizable value of inventories, enterprises should take reliable evidence as the basis, and consider the purpose of holding inventories, the influence of events after the balance sheet date and other factors.

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