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Definition: Inventory Reserve
An inventory reserve is an account which takes into consideration various present conditions and scenarios and write down the value of the inventories. This kind of changes and losses are not yet identified but there is an expectation for the same. The various types of losses are spoilage, theft of property etc. In accounting terms, it is a type of conservative accounting.
Company XYZ maintains a 5% inventory reserve based on their past record. Suppose the company maintains the inventory of Rs.50,000. The entry are Rs.50,000 in COGS account and Rs.50,000 in Inventory reserve account on debit and credit respectively. Later company found that the Rs. 20,000 of goods cannot be sold. They have to write down the value of Rs. 20,000 in inventory reserve account on debit side and an entry of Rs.20, 000 on credit side. Net, there will be Rs. 30,000 in Inventory Reserve account.
If you maintain this account then there will be small changes/decreases in the amount of profits throughout the year. Otherwise, there will be a big changes in the amount of profits of company.