No inventory writeup under GAAP, but how to report?

[bettylll]

Under GAAP, since its not allowed to write up the inventory and only we can report higher profit after inventory sold, how are we going to report that? I mean, when the profit is reported in the IS, therefore in the shareholder’s equity, something must happen as well to the asset, right? If we can do nothing with the inventory item, what other asset item can we do to abide by the double entry rule? Thanks!

 

[S2000magician]

I’m not certain exactly what you’re asking, but I’ll give you a scenario which, I hope, will clarify what happens:
Suppose that the current inventory value on the balance sheet is $1,000, but you find that it is impaired, so you write it down to $700. This year you will have a loss of $300 on your income statement, reducing your net income by $300, reducing your retained earnings by $300. (I’m ignoring income taxes here to simplify the discussion.)
Suppose next year the value of that inventory increases to $900, but you use US GAAP, so you cannot write up the inventory. When you sell that inventory, you will have COGS of $700 (instead of the $900 it should be), so you will have gross profit that is $200 higher, increasing your net income by $200, increasing your retained earnings by $200.