What Is an Inventory Write-Down? (And How to Account For It)

TrackItWeekly offers a 14-day free trial.

Inventory is one of the largest assets on the balance sheet for many small businesses. But what happens when that inventory loses value? Whether stock becomes obsolete, gets damaged, or the market price drops below what you paid, you need to reflect that reality in your books. That process is called an inventory write-down, and getting it right matters for both accurate financials and correct tax reporting.

What Is an Inventory Write-Down?

An inventory write-down reduces the book value of inventory when its market value or net realizable value falls below its original cost. In plain terms: you paid $50 for a unit, but now you can only sell it for $30. The $20 difference is a loss, and your books should reflect it.

The accounting principle behind this is the lower of cost or market rule (also called lower of cost or net realizable value). Inventory should be carried on the books at whichever is lower: what you paid for it, or what it is worth now.

Write-Down vs. Write-Off: What Is the Difference?

These terms get used interchangeably, but they mean different things:

	Inventory Write-Down	Inventory Write-Off
What it means	Reducing the book value of inventory that still has some value.	Removing inventory entirely because it has zero value.
When to use it	Stock is worth less than cost but can still be sold at a discount.	Stock is unsellable: destroyed, lost, stolen, or completely obsolete.
Book value after	Reduced to market or net realizable value.	Reduced to zero.
Example	$50 item now worth $30. Write down by $20.	$50 item destroyed in a flood. Write off $50.

A write-down is a partial reduction. A write-off is a total removal. Both reduce your inventory asset and create an expense, but the magnitude is different.

When to Trigger an Inventory Write-Down

You should evaluate whether a write-down is needed whenever there is evidence that inventory has lost value. Common triggers include:

• Obsolescence: The product has been replaced by a newer model or is no longer in demand. If you cannot sell it at cost, the value has declined.
• Damage: Items are cosmetically damaged or partially defective. They can still be sold, but only at a discount.
• Expiry or shelf life: Perishable goods, food, or pharmaceuticals approaching or past their sell-by date. Their sellable value drops as the deadline approaches.
• Market decline: The market price for the item has dropped below your purchase cost due to competition, new technology, or economic conditions.
• Slow-moving stock: Items that have been in inventory for an extended period with no sales activity. The longer they sit, the less likely they sell at full price.

Many businesses do this assessment at year-end, but it is better to review regularly. A quarterly or even monthly review of slow-moving and aged stock helps you catch write-down candidates before they become full write-offs.

How to Calculate an Inventory Write-Down

The calculation is straightforward:

Write-down amount = Inventory cost - Net realizable value

For example, you have 100 units of a product that cost you $40 each. Due to a new model release, you can only sell them for $25 each. The write-down is:

100 units x ($40 - $25) = 100 x $15 = $1,500

Your inventory book value for these units drops from $4,000 to $2,500, and you record a $1,500 expense.

How to Record an Inventory Write-Down: Journal Entry

The journal entry for a write-down debits an expense account and credits inventory. Here is the standard entry:

Account	Debit	Credit
Cost of Goods Sold (or Inventory Write-Down Expense)	$1,500
Inventory		$1,500

Some businesses use a dedicated "Inventory Write-Down Expense" account for clarity. Others roll it into Cost of Goods Sold. Either is acceptable; the key is consistency. If the write-down is material (large enough to influence a reader's understanding of the financials), a separate line item is preferred so it does not distort your normal COGS.

For a full write-off where the inventory has zero value, the entry is the same structure, but the amount equals the full cost of the inventory being removed.

Tax Treatment of Inventory Write-Downs

For most small businesses using the cash or accrual method, inventory write-downs follow your overall accounting method. If you use the lower of cost or market method for tax purposes, write-downs can reduce your taxable income in the year they are recorded.

Important: if you write inventory down and later sell it for more than the written-down value, the difference is taxable income in the year of sale. You cannot simply reverse the write-down retroactively.

Tax rules around inventory valuation can vary, and the IRS has specific guidance on methods like lower of cost or market. Consult your accountant or tax professional to make sure your write-downs are handled correctly for your tax situation.

How Frequent Counting Catches Write-Down Candidates Early

The biggest problem with write-downs is discovering them too late. If you only review inventory value once a year, you may carry overstated assets for months without knowing it. Regular cycle counts and inventory reviews help you identify damaged, obsolete, or slow-moving stock while it still has some value.

TrackItWeekly makes this easier by giving you visibility into inventory age, movement history, and valuation in one place. Instead of discovering at year-end that half your stock has been sitting untouched for nine months, you can spot the trend early and act on it. Pricing starts at $19/month with a 14-day free trial and no card required.

Best Practices for Inventory Write-Downs

• Review regularly: Do not wait for year-end. Quarterly reviews of aged and slow-moving stock catch problems earlier.
• Document the reason: Record whether the write-down was due to damage, obsolescence, market decline, or expiry. This helps with tax documentation and process improvement.
• Be consistent: Use the same valuation method (cost vs. net realizable value) each period. Switching methods creates inconsistent financials.
• Separate material write-downs: If a write-down is large enough to distort your normal COGS, use a separate expense account for clarity.
• Act on the root cause: If obsolescence is recurring, adjust your purchasing. If damage is recurring, review your storage and handling. TrackItWeekly can help you identify which SKUs are accumulating write-downs so you can fix the upstream issue.

Frequently Asked Questions

What is the difference between an inventory write-down and a write-off?

A write-down reduces the book value of inventory that still has some value, bringing it down to market or net realizable value. A write-off removes inventory entirely because it has zero value, such as goods that were destroyed, lost, or completely obsolete.

When should I write down inventory?

You should write down inventory whenever its net realizable value falls below its cost. Common triggers include obsolescence, damage, approaching expiry, market price decline, and prolonged slow movement. Regular reviews help you catch these situations early.

What is the journal entry for an inventory write-down?

Debit Cost of Goods Sold or a separate Inventory Write-Down Expense account, and credit Inventory for the write-down amount. The amount equals the difference between the inventory's cost and its net realizable value.

Are inventory write-downs tax deductible?

If you use the lower of cost or market method for tax purposes, write-downs can reduce taxable income in the year recorded. However, if you later sell the inventory for more than the written-down value, the difference is taxable in the year of sale. Consult your tax professional for your specific situation.

How often should I review inventory for write-downs?

At minimum, review at year-end. Quarterly reviews are better, especially for businesses with perishable goods, fast-moving product lines, or seasonal items. Frequent cycle counts help you identify write-down candidates before they become full write-offs.