Inventory reserve

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Inventory reserve
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Inventory reserve an inventory reserve is a contra asset account on a company's balance sheet made in anticipation of inventory that will not be able to be sold. Every year a company has inventory that cannot be sold for a variety of reasons. It may spoil, fall out of fashion or become technologically obsolete. A term that refers to a reserve used to account for inventory that is not sold at its cost. This type of entry is used on the balance sheet to show earnings deductions on the worth of inventoried assets. The product placed by the handler in the primary inventory reserve must have been produced in either the current or the preceding two crop years. Inventory reserve portion shall be equal to the sum of the products obtained by multiplying the weight or volume of them in each lot of acquired during the fiscal period. Inventory reserves are those items that are committed to someone but still appear on the shelf and in the on-hand quantity figure. It might be that an inside salesperson just took a will-call order and committed certain inventory to a customer but those items have not yet been pulled. Or perhaps a branch manager just called in, checked stock and asked for a commitment on a certain item. That commitment to a branch should be set up as a reserve so that if it is the last item on the shelf the commitment will be honored[1].

Off-premise inventory reserve

Any handler may, upon notification to the Board, arrange to hold inventory reserve, of his or her own production or which was purchased, on the premises of another handler or in an approved commercial storage facility in the same manner as though the inventory reserve were on the handler's own premises[2].

Secondary inventory reserve

Specific rules[3]:

  • In the event the inventory reserve established of this part is at its maximum volume, and the Board has announced, in accordance with that volume regulation will be necessary to maintain an orderly supply of quality products for the market, handlers in a regulated district may elect to place in a secondary inventory reserve all or a portion of the products the volume regulation would otherwise require them to divert in accordance.
  • Should any handler in a regulated district exercise his or her right to establish a secondary inventory reserve under paragraph of this section all costs of maintaining that reserve, as well as inspection costs, will be the responsibility of the individual handler.
  • The secondary inventory reserve shall be established in accordance with other rules and regulations which the Board, with the approval of the Secretary, may establish.
  • The Board shall retain control over the release of any products from the secondary inventory reserve. No products may be released from the secondary reserve until all products in any primary inventory reserve are established.


  1. R.G Broeckelmann 2010,p.138
  2. Code of Federal Regulations 2012,p.230
  3. Code of Federal Regulations 2012,p.230-231


Author: Patrycja Bajda