What Is Inventory Write-Down?
Also known as: Inventory Write-Off, Lower of Cost or NRV, Inventory Revaluation Loss, Inventory Impairment
Definition
An inventory write-down reduces the recorded value of inventory when its net realizable value falls below cost, because of obsolescence, damage or falling prices. A write-off removes the remaining value entirely.
Inventory Write-Down Explained
Inventory must not be carried above what it can be recovered for. Under IFRS (IAS 2) inventory is measured at the lower of cost and net realizable value, where net realizable value is the estimated selling price less costs to complete and sell. Under US GAAP, companies using FIFO or average cost apply lower of cost and net realizable value, while LIFO and retail method users apply lower of cost or market. When the carrying amount exceeds the recoverable amount, the difference is written down.
The typical entry debits cost of goods sold (or a separate inventory write-down expense account) and credits inventory or an inventory reserve. A reserve keeps the item in the subledger at cost while a contra account carries the loss, which is common for E&O reviews. A write-off applies when the stock is scrapped or disposed of: the item is removed from the subledger with an inventory adjustment and the reserve is released against it.
ERP mechanics vary. SyteLine and Infor LN post quantity-based adjustments and cost changes through inventory adjustment or revaluation transactions, and NetSuite has inventory adjustment and inventory cost revaluation transactions for value changes. A write-down of value without a quantity change is often a revaluation of unit cost or a journal entry against a reserve account, so confirm with finance which route applies and keep the supporting analysis.
Reversals are treated differently by regime. IFRS requires reversal of a prior write-down when net realizable value recovers, up to the original cost, while US GAAP generally prohibits reversal because the written-down amount becomes the new cost basis. Document the evidence for every write-down: aging, usage, selling price data and disposal plans.
Why It Matters
- Overstated inventory overstates assets and profit, and is a frequent audit adjustment.
- Timing affects which period absorbs the loss, so a documented policy limits year-end surprises.
- Tax treatment can differ from book treatment, so finance needs the detail by item.
- Write-downs feed gross margin analysis, so operations should understand their cause.
In Practice
Example: 1,000 units carried at 20 each (20,000) are expected to sell at 12 with 1 per unit selling cost, so net realizable value is 11 per unit. Write-down is (20 - 11) x 1,000 = 9,000: debit write-down expense 9,000, credit inventory reserve 9,000.
Frequently Asked Questions
What is the difference between a write-down and a write-off?
A write-down reduces carrying value to a lower recoverable amount. A write-off removes the remaining value entirely, typically on scrap or disposal.
What is the journal entry for an inventory write-down?
Debit cost of goods sold or an inventory write-down expense and credit inventory or an inventory reserve for the difference between cost and net realizable value.
Can an inventory write-down be reversed?
Under IFRS, yes, up to original cost if net realizable value recovers. US GAAP generally does not allow reversal because the written-down amount becomes the new cost basis.
How do you support a write-down for auditors?
Keep aging and usage data, recent selling prices, disposal or rework plans and the calculation by item. Apply the same policy every period.
Related Terms
Obsolete Inventory (Excess and Obsolete Stock)
Obsolete inventory is stock with little or no expected future sales or usage because of design changes, end-of-life products, demand decline, or shelf-life expiry. Excess inventory is stock above forecast need. Together they are called E&O.
Inventory Shrinkage
Inventory shrinkage is the difference between inventory recorded in the system and what is physically present, caused by theft, damage, spoilage, counting or transaction errors, and unrecorded scrap. It is measured at cost or as a percent of sales.
Standard Cost
Standard cost is a predetermined per-unit cost for material, labor, and overhead, set in advance and used to value inventory and transactions. Differences between standard and actual are captured as variances that isolate where cost deviated.
FIFO Costing (First-In, First-Out)
FIFO costing is an inventory valuation method that assigns the cost of the oldest receipts to units issued or sold first, leaving the most recent purchase costs in ending inventory. It tracks cost in layers by receipt.
Scrap Rate
Scrap rate is the percentage of production output discarded as unusable because it cannot be economically reworked to specification, calculated as scrapped units divided by total units produced over a defined period.
Go Deeper
Inventory Carrying Cost Calculator
Build your true annual carrying cost from capital, storage, insurance, and obsolescence components - and see what an inventory reduction target is worth.
How to Manage Inventory Aging in SyteLine
Step-by-step guide to managing inventory aging in Infor SyteLine CloudSuite Industrial, including aging reports, obsolescence reserves, and disposition workflows.
How to Configure Inventory Adjustments in SyteLine
Step-by-step guide to configuring inventory adjustments in Infor SyteLine CloudSuite Industrial, including adjustment reasons, approval workflows, and GL account mapping.
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