An inventory write-down is reducing the value of stock on your books because it's now worth less than it cost: it's close to its date, damaged, out of fashion, or its market price has fallen. Under US accounting rules, stock valued by FIFO or average cost is carried at the lower of its cost and its net realizable value, which is what you can sell it for less the cost of selling it. The difference is the write-down, recorded as a loss now rather than when the stock finally sells or is thrown away. A write-off is the extreme case: the stock is worth nothing and comes off the books entirely. Below are three examples worked through, the journal entry, and the records that make a write-down stand up.
The short version
- Write down stock when it's worth less than it cost to you.
- New value = net realizable value: expected selling price minus the cost of selling it.
- Write-down = (cost − net realizable value) × quantity.
- A write-off is a write-down to zero, for stock you can't sell or use.
- Record it in the period you find it, with its reason and evidence.
- Under US accounting rules, a write-down isn't reversed later if the value recovers.
- TaroStack shows stock that's ageing or near its date, with its cost, before it's too late. More below.
Write-down or write-off
| Write-down | Write-off | |
|---|---|---|
| The stock | Still sellable or usable, for less | Can't be sold or used |
| New value | Net realizable value | Zero |
| Examples | Short-dated nuts, label misprints, seconds | Expired, spoiled, contaminated |
| What happens next | Sold or used at the lower value | Thrown away or donated |
Both lower inventory and record a loss. The difference is whether anything is left on the books.
Three examples
Windward Roots, the made-up taro business I use in these examples, finds three problems at month end.
Nuts close to their date. 40 kg of macadamia nuts that cost $22.00 a kilo have six weeks left, not enough to use in granola before the date. A local baker will take them at $14.00 a kilo, with $1.00 a kilo to deliver them.
Net realizable value $14.00 − $1.00 = $13.00 a kg
Write-down ($22.00 − $13.00) × 40 kg = $360.00
Seconds. 48 jars of body butter have smudged labels. They cost $5.16 each and will sell as seconds at the market for $6.00, with $1.50 a jar of selling cost.
Net realizable value $6.00 − $1.50 = $4.50 a jar
Write-down ($5.16 − $4.50) × 48 = $31.68
Obsolete packaging. 2,000 printed chip pouches with the old design, which cost $0.31 each, can't be used now the label has changed, and nobody will buy them. That's a write-off: 2,000 × $0.31 = $620.00.
Notice the seconds: their write-down is small, because they still sell for more than most of their cost. A write-down is only the part of the cost you won't get back.
The journal entry
The three together come to $1,011.68:
| Account | Debit | Credit |
|---|---|---|
| Loss on inventory write-down | $1,011.68 | |
| Inventory | $1,011.68 |
Some businesses report the loss inside cost of goods sold; others keep it on its own line so it's visible. Either way, the nuts now sit on the books at $520.00, the seconds at $216.00, and the pouches at nothing. Under US accounting rules that lower value becomes the new cost, and it isn't written back up if the market recovers. How the cost of goods sold entries around this work is in cost of goods sold journal entry, and the lower-of-cost rule in the context of valuation methods is in what is inventory valuation.
The tax side, briefly
For taxes, goods that can't be sold at normal prices because of damage, imperfections, changes of style, odd or broken lots or similar causes can be valued at a bona fide selling price less the direct cost of getting rid of them, and that selling price means the goods are actually offered for sale within 30 days after the inventory date (26 CFR 1.471-2(c)). The burden of proof is yours, with records of how the goods were disposed of. Expired stock thrown away, and donations, are covered in expired inventory tax write-off. This is general information, not tax or accounting advice.
The records behind a write-down
| Record | Example |
|---|---|
| What, and how much | Macadamia nuts, 40 kg, lot MAC-0712 |
| Why | Six weeks to best-by; won't be used in time |
| Cost | $22.00 a kg, $880.00 |
| Net realizable value and how you got it | Baker's offer, $14.00 a kg less $1.00 delivery |
| Write-down | $360.00 |
| When and who | Sept 30, approved by the owner |
| What happened next | Sold to the baker Oct 4, invoice 1093 |
The last line is the one people forget: evidence that the stock was in fact sold, offered or disposed of at the value you used. A photo of damaged stock and the offer or invoice do most of the work.
Where this stops working
A write-down only happens if somebody notices in time. On a spreadsheet, nothing tells you the macadamias have six weeks left until someone opens the bin; the old pouches sit in a box until the year-end count; and the seconds are a note on the market float. By then the nuts are expired, a write-off instead of a write-down, and the loss is bigger than it needed to be.
How TaroStack does it
TaroStack shows you the stock that's losing value while there's still time to sell it, and keeps the record of every write-off.
It warns before stock loses value. Every lot carries its dates, and TaroStack forecasts which lots will expire before they're used and what that stock cost, at the rate each item leaves each site, so the macadamias show up as stock at risk, with its cost, six weeks out, not as a bin of expired nuts. Alerts for expiring lots come in the app and by email. Stock that isn't moving shows how long since it last went out, which is where the obsolete pouches surface.
Every adjustment carries its reason. When stock is written off, damaged or used as a sample, the adjustment carries its reason (expired, spoiled, damaged, sample, correction), with who and when, so the losses report shows what was lost, by reason, item and site, and what it cost. Corrections are recorded as corrections and can be undone. That's the record behind the entry, kept as it happens.
And the cost is right to begin with. Stock is valued at what it really cost, in FIFO layers or moving average, with freight spread across each delivery, so the cost side of every write-down is accurate. Stock value is kept per site, item and type, with a month-by-month history. The write-down entry itself is your accountant's; TaroStack gives it the quantities, the cost and the reason.
| The job | On a spreadsheet | In TaroStack |
|---|---|---|
| Spot stock losing value | When someone opens the bin | Expiry forecast and stock not moving, with cost |
| The cost to write down from | Last price typed in | What it really cost, by layer |
| The record | A note, maybe | Every adjustment with its reason, who and when |
| Monthly losses | Added up at year end | The losses report, by reason and site |
Lots, expiry alerts, the expiry forecast, stock value and the losses report are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.