What is an inventory write-down?

Definition

An inventory write-down is the book entry that takes cost off stock that will not recover what you paid. On the books, this is a reduction of inventory, with a matching charge on the profit and loss statement.

The goods can still sit on the shelf. The write-down changes only the carrying amount, not the unit count.

Where it shows up

Balance Sheet: Related to the inventory line when carrying value is reduced.

P&L: Related to cost of goods sold when the write-down is recorded.

See also: Inventory Reserve · Cost Of Goods Sold · Obsolete Inventory

When you look at your Balance Sheet, the write-down shows up as a smaller inventory line in current assets. Some packs credit inventory directly; others credit an inventory reserve and print only the net amount.

A large write-down relative to the stock on hand means a sizable share will not recover its cost. A small one can mean a few damaged units, or an estimate that is still catching up.

The profit and loss statement picks up the charge in the period you record it. It often sits in cost of goods sold, or as its own write-down line so a reader can see it.

This entry is typically non-cash. Cash already moved when you bought the goods; the write-down only lowers the book value that remains.

Damaged units, leftover seasonal goods, and items that have stopped selling are common reasons. A count can find the damaged pieces; slow goods can need a write-down even when the count matches the books.

How it works

You start from the cost already sitting in inventory. A write-down is needed when that cost is higher than what the goods can actually bring.

The shortfall can come from damage, from product that no longer sells, or from a market price that has fallen below cost. The lower of cost or market rule is one common trigger.

You measure the gap in round, supportable dollars. Then you debit a write-down expense, or cost of goods sold, and credit inventory.

Some books credit the inventory reserve instead of the stock line. Either path reduces net inventory and hits the P&L in this period.

Crediting inventory takes the dollars off the gross line right away. Crediting a reserve leaves the gross line in place and reduces the net assets by the same amount.

If a reserve was already funded, using it later to take specific units off the gross line does not record that same expense twice. The write-down already hit the P&L when the reserve was set up.

The write-down is not a sale. The goods may still be there, marked down, waiting for a buyer, or waiting to be thrown out.

You do not write the stock back up if prices recover later, except in limited cases your framework allows. The conservative step is the reduction, not a later mark-up.

Keep the amount tied to support you can explain. A round number with no damaged list and no note is hard to defend at close.

Example

A neighborhood bike shop has eight frames that were dented in a shipment. The frames cost $800, and they will now sell only as discounted display pieces for $200.

Cost is $800 and recoverable value is $200. The shop records a $600 write-down.

Debit: Inventory write-down $600

Credit: Inventory $600

Inventory on the Balance Sheet falls from $800 to $200 for those frames. The profit and loss statement takes a $600 write-down in the same period.

Assets are lower by $600, and equity is lower through the loss. Cash does not move, because the frames were paid for when they arrived.

The shop still has eight dented frames on the floor. The write-down changed only the cost those frames are allowed to carry.

Common mix-ups

A write-down is not the same as an inventory reserve. The write-down is the P&L charge; the reserve is the Balance Sheet credit some books use to hold the estimate.

A write-down is not shrinkage. Shrinkage is missing units; a write-down is units that are still there but worth less than cost.

A write-down is not a cash refund from the vendor. The vendor already has the money; you are only lowering the book value of what is left.

Related terms

• Inventory Reserve: A contra-asset account estimating inventory value that will not be recovered.
• Obsolete Inventory: Stock that no longer sells and is unlikely to move at normal prices.
• Lower Of Cost Or Market: A rule requiring inventory to be carried at the lower of its cost or what it can actually be sold for.
• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Shrinkage: Inventory lost to theft, damage, or counting error.
• Inventory: Goods held for sale or used to produce goods for sale.
• Physical Inventory Count: A full hands-on count of stock used to correct the recorded balance.