{"id":1666,"date":"2021-09-08T16:07:09","date_gmt":"2021-09-08T21:07:09","guid":{"rendered":"https:\/\/www.shipbob.com\/au\/blog\/inventory-write-down\/"},"modified":"2025-12-25T20:20:48","modified_gmt":"2025-12-25T20:20:48","slug":"inventory-write-down","status":"publish","type":"blog","link":"https:\/\/www.shipbob.com\/au\/blog\/inventory-write-down\/","title":{"rendered":"Inventory Write-Downs Explained: Accounting Methods, Tips, and Best Practices"},"content":{"rendered":"\n

Table of Contents<\/p>

** Minutes<\/p><\/div><\/div>\n

What is an inventory write-down?<\/a><\/p>\n\n\n\n

What causes inventory write-downs?<\/a><\/p>\n\n\n\n

Accounting methods for writing down inventory<\/a><\/p>\n\n\n\n

Tips for reducing inventory impairment<\/a><\/p>\n\n\n\n

How ShipBob helps you prevent inventory write-downs<\/a><\/p>\n\n\n\n

Inventory write-down FAQs<\/a><\/p>\n\n\n\n

<\/a><\/p>\n<\/div>\n\n\n\n

Unless it\u2019s an original Picasso painting or a classic Chanel handbag, most tangible items lose their value over time.<\/p>\n\n\n\n

Running an online business, it\u2019s important to keep value depreciation in mind when tracking, managing, and reporting on inventory.<\/p>\n\n\n\n

In an ideal scenario, when all your inventory gets sold at a net profit, you achieve maximum ROI. But, in the real world, things work a little differently. <\/span><\/p>\n\n\n\n

I<\/span>t\u2019s not uncommon to report a small loss due to inventory value depreciation. When this occurs, an inventory write-down is required to ensure you still end up with healthy profit margins.<\/span><\/p>\n\n\n\n

In this article, learn what an inventory write-down entails, inventory accounting best practices, and how a 3PL like ShipBob can help you better track, manage, and report on your inventory. <\/span><\/p>\n\n\n\n

What is an inventory write-down?<\/h2>\n\n\n\n

An inventory write-down, also referred to as \u201cinventory impairment,\u201d is an accounting term that recognises when your inventory\u2019s market value falls below the book value, but it still considered sellable. <\/span><\/p>\n\n\n\n

When inventory loses partial value, it must be recorded as an inventory write-down expense on a company\u2019s balance sheet, and it must be made as soon as possible to lessen tax liability.<\/p>\n\n\n\n

The write-down affects your business balance sheet and income statement, and it can cause a drop in net income, which, in turn, reduces the shareholder equity and retained earnings.<\/span><\/p>\n\n\n\n

Note: You might have also heard the term \u201cinventory write-off<\/a>,\u201d which is very similar, but there\u2019s a slight different. Inventory write-down is written down when an asset\u2019s value depreciates but still holds some value, whereas a write-off is when an asset loses all<\/em> of its value and must be removed from accounting records entirely.<\/p>\n\n\n\n

What causes inventory write-downs?<\/h2>\n\n\n\n

From ordering too much inventory to begin with, to a decline in demand, there are several reasons why inventory can lose its value. Here are some of the most common reasons that can lead to an inventory write-down.<\/span><\/p>\n\n\n\n

Excess inventory<\/h3>\n\n\n\n

Many times, retailers<\/a> tend to order too much inventory<\/a>, based on a gut feeling, without taking projected future demand into consideration. Apart from inaccurate demand forecasting<\/a>, poor sales efforts can also result in a stockpile of <\/span>dead stock<\/span><\/a>.<\/span><\/p>\n\n\n\n

The longer the unsold inventory stays in the warehouse, the higher the <\/span>holding costs<\/span><\/a>and more you\u2019re at risk of carrying obsolete inventory<\/a> (i.e., product that is no longer in demand)<\/span>. This expense includes the cost of capital and storage fees, both of which will need to be written down. <\/span><\/p>\n\n\n\n

Expired inventory<\/h3>\n\n\n\n

Physical inventory<\/span><\/a> of perishable goods have a shorter shelf life. Once inventory becomes expired, it is no longer sellable. <\/span><\/p>\n\n\n\n

If SKUs are left unsold in your warehouse for too long, they cross the expiry date and completely lose value. At this point, the expired inventory can no longer be written down but rather \u201cwritten-off\u201d and counted as a complete loss<\/span>.<\/p>\n\n\n\n

Keeping accurate and up-to-date <\/span>inventory records<\/span><\/a> and making sure the first batch of inventory is sold first can help reduce inventory waste. <\/span><\/p>\n\n\n\n

Damaged inventory<\/h3>\n\n\n\n

Purchased inventory can get damaged in transit, while being picked, or even in storage. Storing and shipping fragile items<\/a> are more prone to getting broken, bent, or otherwise defective, which then leads to revenue loss.<\/span><\/p>\n\n\n\n

Luckily, much of it can be prevented. A well-designed <\/span>warehouse setup<\/span><\/a>, the right equipment, well-trained warehouse staff, appropriate shipping of fragile items, and proper <\/span>warehouse receiving<\/span><\/a> processes can all help reduce the risk of inventory losing value. <\/span><\/p>\n\n\n\n

Accounting methods for writing down inventory<\/h2>\n\n\n\n

For inventory write-downs specifically, there are two primary <\/span>inventory accounting<\/span><\/a> methods: direct write-off and allowance method.<\/span><\/p>\n\n\n\n

The inventory valuation method<\/span><\/a> you choose depends on how significant the inventory write-down is. Here is a deeper dive into the two different methods. <\/span><\/p>\n\n\n\n

Direct write-off method<\/h3>\n\n\n\n

The direct write-off method requires writing down unsold inventory that\u2019s lost value as a \u201cbad debt expense.\u201d<\/span><\/p>\n\n\n\n

For example, a company that sells mobile phones had inventory worth $10,000 in the beginning of the year. Of this lot, $1,000 worth of inventory was outdated by year-end. So, the company\u2019s accountant will decrease the inventory account by the write-off value and COGS<\/a> increases accordingly.<\/span><\/p>\n\n\n\n

It\u2019s worth noting that smaller write-offs can be reported as COGS, rather than a write-down. But larger amounts must always be entered as a separate line on the income statement. <\/span><\/p>\n\n\n\n

But, adding the write-off amount to the COGS account can create a misleading picture of your businesses\u2019 gross margin, since there is no matching journal entry for the revenue secured by the sale of the SKU<\/a>.<\/span><\/p>\n\n\n\n

Note: Recurring inventory write-offs can be a red flag and could be perceived as inventory fraud. Always consult your CPA or accountant on the best way to report inventory value.<\/span><\/p>\n\n\n\n

Allowance method<\/h3>\n\n\n\n

The allowance method is a more elaborate process since some money is set aside to cover inventory that might lose some or all of its value in the future. <\/span><\/p>\n\n\n\n

Unlike the direct write-down method, the allowance method requires you to report bad debt expenses<\/a> every fiscal year.<\/p>\n\n\n\n

This method allows you to track the total size of the write-down and keep tabs on the historical cost in the original inventory account.<\/span><\/p>\n\n\n\n

This predicted drop in inventory value is credited to a separate contra asset account (i.e., inventory reserve or allowance for obsolete inventory) which offsets the inventory line item in the balance sheet. It is also debited from the expense account. <\/span><\/p>\n\n\n\n

For example, a mobile phone retailer has assets worth $10,000 and tags goods worth $1,000 for disposition. Then, they immediately create an inventory reserve account, to which they add $1,000 and deduct the same amount as an expense.<\/span><\/p>\n\n\n\n

When the inventory is disposed of, you can debit the inventory reserve and credit the inventory account.<\/span><\/p>\n\n\n\n

Tips for reducing inventory impairment<\/h2>\n\n\n\n

Did you know that inventory accounts for 45-90%<\/a> of your business\u2019s overall budget? <\/span>When you invest so much capital, you would want to get good returns. <\/span><\/p>\n\n\n\n

Inventory write-downs can cause an increase in COGS and a decrease in gross profit, which is why it is advisable to plan ahead and find ways to maintain optimal inventory levels<\/a> to meet demand.<\/span><\/p>\n\n\n\n

Here are some <\/span>inventory optimisation<\/span><\/a> tips and best practices to reduce inventory value depreciation. <\/span><\/p>\n\n\n\n

Track inventory expiration with an inventory management system<\/h3>\n\n\n\n

Regular <\/span>inventory audits<\/span><\/a> play a huge role in reducing risk of expiry, especially of SKUs that have a shorter shelf life. <\/span><\/p>\n\n\n\n

By using <\/span>inventory management software<\/span><\/a>, as well as<\/span> <\/span>inventory scanners<\/span><\/a>, you can better<\/span> track expiration dates of stock units and help ensure products that expire the earliest are sold first. <\/span><\/p>\n\n\n\n

For instance, ShipBob\u2019s lot feature<\/a> allows you to separate items based on their lot numbers. When you send us a lot item, we will not store it with other non-lot items, or other lots of the same item.<\/p>\n\n\n\n

With lot tracking<\/a>, ShipBob also uses the first in, first out (FIFO)<\/a> inventory valuation<\/a> logic designed to identify shelves that contain items with an expiry date first and always ship the nearest expiring lot date first. If you have items stored in different bins \u2014 one with no lot date and one with a lot date \u2014 we will always ship the one updated with a lot date.<\/p>\n\n\n\n

Forecast demand to keep optimal stock levels<\/h3>\n\n\n\n

By taking a look at historical data, you can predict future demand for each SKU<\/a> and make informed decisions to avoid purchasing too much of an item that might lose its value before it gets sold.<\/p>\n\n\n\n

Rather than ordering more than enough inventory to ensure you meet demand, having data-driven predictions on how much inventory to have on hand can significantly reduce the risk of holding onto inventory that is at risk of losing value.<\/p>\n\n\n\n

With better inventory forecasting<\/a>, you not only improve and optimise your ideal stock levels, but you also improve cash flow and even free up funds for other areas of the business, including ecommerce warehousing<\/a>.<\/p>\n\n\n\n

Keep in mind that if you partner with a 3PL<\/a>, you may have this data to refer to. For instance, ShipBob offers inventory forecasting data and insights to help you discover:<\/p>\n\n\n\n