Vietnam: What does allowance for decline in inventories mean? What are the rules for accounting allowance for decline in inventories?
- What does allowance for decline in inventories in Vietnam mean? What are the rules for accounting allowance for decline in inventories?
- Which Account is used to account for allowance for decline in inventories in Vietnam?
- What is the method of accounting for allowance for decline in inventories in Vietnam?
What does allowance for decline in inventories in Vietnam mean? What are the rules for accounting allowance for decline in inventories?
Allowance for decline in inventories means an allowance for decline in inventories due to increases in net realizable value against original value of inventories.
Under Point 1.5, Clause 1, Article 45 of Circular 200/2014/TT-BTC on the rules for accounting allowance for decline in inventories:
(i) The enterprise shall create an allowance for decline in inventories if it is evident that there is a decrease in net realizable value against the original cost of inventories. Allowance for decline in inventories means an estimated amount of decline in value of inventories against book value of inventories which is included in the operating cost in order to compensate actual damage caused by the decline.
(ii) The allowance for decline in inventories shall be created at the time in which the financial statement is prepared. The creation of allowance for decline in inventories must be complied in accordance with VAS “Inventories” and financial regime in force.
(iii) The allowance for decline in inventories shall be created according to every inventoried material or good. With regard to services in progress, the allowance for decline in inventories shall be created according to every service having their own prices.
(iv) Net realizable value (NRV) means the estimated selling price in the ordinary course of business minus (-) any cost to complete and to sell the goods.
(v) When preparing financial statement, the creation of allowance for decline in inventories shall be determined according to quantity, original cost and NRV of every material, good or service in progress:
- If the amount of allowance for decline in inventories at the end of current accounting period is greater than the allowance for decline in inventories recorded in the accounting records, the positive difference shall be recorded to an increase in allowance and an increase in costs of goods sold.
- If the amount of allowance for decline in inventories at the end of current accounting period is smaller than the allowance for decline in inventories recorded in the accounting records, the negative difference shall be recorded to a decrease in allowance and a decrease in costs of goods sold.
Which Account is used to account for allowance for decline in inventories in Vietnam?
Under Clause 2, Article 45 of Circular 200/2014/TT-BTC:
2. Structure and contents of account 229 – Allowance for impairment of assets
…
Account 229 – Allowance for impairment of assets comprises 4 sub-accounts
Account 2291 – Allowance for decline in value of trading securities: this account is used to record creating or reverting of allowance for decline in value of trading securities.
Account 2292 – Allowance for impairments in other entities: this account is used to record creating or reverting of allowance for impairments suffered by an investor due the loss of the investee.
Account 2293 – Allowance for doubtful debts: This account is used to record creating or reverting of allowance for doubtful receivables and held to maturity investments.
Account 2294 – Allowance for decline in inventories: this account is used to record creating or reverting of allowance for decline in inventories.
Thus, Account 2294 is used to account for allowance for decline in inventories. This account is used to record the creating or reverting of allowance for decline in inventories.
What is the method of accounting for allowance for decline in inventories in Vietnam?
Under Clause 3, Article 45 of Circular 200/2014/TT-BTC on the method of accounting for allowance for decline in inventories:
(i) When preparing a financial statement, if the allowance for decline in inventories created in this period is greater than the allowance created in the previous period, the difference between them shall be additionally created and the following accounts shall be recorded:
Dr 632 – Costs of goods sold
Cr 229 – Allowance for impairment of assets (2294).
(ii) When preparing a financial statement, if the allowance for decline in inventories created in this period is smaller than the allowance created in the previous period, the difference between them shall be converted and the following accounts shall be recorded:
Dr 229 – Allowance for impairment of assets (2294).
Cr 632 – Costs of goods sold.
(v) Accounting for allowance for decline in inventories regarding materials or goods which are destroyed after expiry date, degraded, deteriorates, or useless, the following accounts shall be recorded:
Dr 229 – Allowance for impairment of assets (2292) (compensation covered by the allowance)
Dr 229 – Costs of goods sold (if the impairment loss is greater than the allowance)
Cr 152, 153, 155, 156.
(iv) Accounting for allowance for decline in inventories before the wholly-state-owned enterprise is converted into a joint-stock company: The remaining allowance for decline in inventories after compensating for the impairment loss shall be recorded to an increase in state capital as follows:
Dr 229 – Allowance for impairment of assets (2294).
Cr 411 – Owner's invested equity.
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