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TL;DR: Inventory write-downs adjust stock value when items lose worth due to damage, obsolescence, or low demand. Done right, they keep accounts accurate and reduce tax shocks.
Inventories rarely stay constant in value. Market changes, damage, theft, or outdated products can reduce what stock is actually worth. An inventory write-down corrects this gap between book value and real value, ensuring financial statements remain accurate.
Define Inventory Write-Down
An inventory write-down is an accounting adjustment made when the market value of inventory falls below its recorded cost but is not zero. The reduced value is recognised either in cost of goods sold or as a separate expense, depending on materiality.
Journal Entry for Inventory Write-Down
When the write-down amount is small, it is typically adjusted through cost of goods sold. For larger write-downs, a separate inventory write-down expense is recorded, with a corresponding reduction in inventory value.
What Products Are Eligible for a Write-Down?
Raw materials, work-in-progress, and finished goods can all be written down if their value declines. If items become completely worthless, they must be written off instead of written down.
Accounting Practices for Inventory Write-Down
Direct Write-Off Method
Inventory losses are recognised immediately as an expense, usually through cost of goods sold.
Allowance Method
A reserve is created to estimate future inventory losses, spreading the impact across reporting periods.
How Does Inventory Write-Down Affect Business?
Inventory write-downs reduce reported profits and taxable income. They also impact balance sheet values and key ratios like inventory turnover, gross margin, and current ratio.
Write-Down vs. Write-Off of Inventory
A write-down reduces inventory value partially, while a write-off removes it entirely from records. Both occur due to obsolescence, damage, or loss.
Steps to Writing Down Inventory
Compare book value with current market value.
Decide whether the impact is material.
Record the adjustment correctly.
Analyse root causes to prevent recurrence.
Reducing Inventory Write-Downs
Better demand planning, smaller order cycles, inventory protection, and software-based tracking help minimise write-down risks.
FAQs
What is an inventory write-down?
It is an accounting adjustment that lowers inventory value when goods are worth less than their recorded cost.
How does a write-down affect profits?
It reduces reported profit by increasing expenses.
Where is an inventory write-down recorded?
In cost of goods sold or as a separate expense, depending on size.
What is the difference between a write-down and write-off?
Write-down reduces value partially; write-off removes it fully.
How can businesses reduce inventory write-downs?
Through demand forecasting, better storage, and inventory management software.
