Quick Answer: An inventory write-down reduces the carrying value of inventory to its net realizable value (NRV) when the market value drops below cost. Under both GAAP and IFRS, the journal entry debits an expense account (Cost of Goods Sold or Inventory Write-Down Expense) and credits Inventory directly or an inventory reserve account. Once written down, the new lower value becomes the inventory's cost basis — reversals are permitted under IFRS but prohibited under U.S. GAAP.
Inventory doesn't always hold its value. Products become obsolete, get damaged in the warehouse, or simply can't be sold for what they cost. When that happens, accounting rules require you to write down the inventory to its net realizable value — the estimated selling price less costs to complete and sell. This guide walks through every journal entry you'll need, from initial write-down to the eventual sale or disposal.
What Triggers an Inventory Write-Down?
An inventory write-down is required when the carrying value of inventory on your balance sheet exceeds its net realizable value (NRV). Common triggers include:
- Obsolescence: Products that are outdated or replaced by newer versions
- Physical damage: Items damaged in storage, transit, or during handling
- Market price declines: When market selling prices fall below cost
- Slow-moving inventory: Stock that hasn't sold and shows no near-term demand
- Expiration: Perishable goods approaching or past their shelf life
For damage-specific scenarios, see our detailed guide on journal entries for damaged inventory. For standard inventory tracking, start with journal entries for inventory.
Lower of Cost or Net Realizable Value (LCNRV)
The lower of cost or net realizable value (LCNRV) rule is the accounting principle that governs inventory write-downs. Here's how to calculate NRV:
NRV = Estimated Selling Price − Estimated Costs to Complete − Estimated Costs to Sell
If NRV is below the inventory's carrying cost, you must write it down. Under IFRS, you compare cost to NRV at the individual item level. Under U.S. GAAP, you can group similar items. Once written down, the new value becomes the cost basis going forward — and under U.S. GAAP, no reversal is permitted even if market conditions improve.
Journal Entry for an Inventory Write-Down (Direct Method)
The simplest approach writes down inventory directly — debiting an expense and crediting the Inventory account. This method is appropriate when the write-down is clearly identified and permanent.
Scenario: Obsolete Inventory Write-Down
A retailer carries 500 units of a discontinued phone case model. Original cost was $12 per unit ($6,000 total). The estimated selling price is now $7 per unit, with $1 per unit in selling costs, giving an NRV of $6 per unit ($3,000 total). The write-down is $6,000 − $3,000 = $3,000.
Journal Entry — Direct Inventory Write-Down
| Cost of Goods Sold — Inventory Write-Down | $3,000 | |
| Inventory | $3,000 | |
| (To write down obsolete inventory to NRV of $6/unit) | ||
After this entry, the inventory balance for those units is $3,000 ($6 × 500), and the $3,000 loss flows through the income statement in Cost of Goods Sold. For more on how inventory flows into COGS, see journal entries for cost of goods sold.
Journal Entry Using an Inventory Reserve (Allowance Method)
Larger companies often use an inventory obsolescence reserve — a contra-asset account similar to the allowance for doubtful accounts. This preserves the original cost information in the Inventory account while separately tracking the valuation adjustment.
Journal Entry — Inventory Reserve Method
| Inventory Write-Down Expense | $3,000 | |
| Allowance for Inventory Obsolescence | $3,000 | |
| (To record inventory obsolescence reserve) | ||
On the balance sheet, Inventory appears at its gross cost of $6,000, less the $3,000 allowance, for a net carrying value of $3,000 — the same result as the direct method but with better audit trail.
Journal Entry When Written-Down Inventory Sells
When you eventually sell the written-down inventory, the cost removed from the balance sheet is the new, lower carrying value — not the original cost.
Journal Entry — Sale of Written-Down Inventory
| Cash | $3,500 | |
| Sales Revenue | $3,500 | |
| Cost of Goods Sold | $3,000 | |
| Inventory | $3,000 | |
| (To record sale of 500 units at $7 each; COGS reflects post-write-down value) | ||
Notice that COGS is $3,000 (the NRV-based carrying value), not the original $6,000 cost. The write-down already recognized the loss — selling at NRV produces zero additional margin on these units.
Journal Entry for Inventory Write-Off (Full Write-Down to Zero)
If inventory has no realizable value — it's completely obsolete, destroyed, or expired with no salvage potential — you write it off entirely.
Journal Entry — Full Inventory Write-Off
| Loss on Inventory Write-Off | $6,000 | |
| Inventory | $6,000 | |
| (To write off inventory with zero net realizable value) | ||
A full write-off is more severe than a write-down and often requires separate disclosure in the financial statement footnotes, particularly if the amount is material. If the inventory was previously written down using a reserve, you clear both the gross inventory and the allowance: debit Allowance for Inventory Obsolescence and Loss on Write-Off, and credit Inventory for the gross amount.
GAAP vs. IFRS: Key Differences in Inventory Write-Downs
| Aspect | U.S. GAAP (ASC 330) | IFRS (IAS 2) |
|---|---|---|
| Valuation rule | Lower of cost or market (LCM) | Lower of cost or NRV |
| Reversal permitted? | No — write-downs are permanent | Yes — reverse up to original cost if NRV recovers |
| Grouping | Can group similar items | Generally item-by-item |
| LIFO allowed? | Yes | No — LIFO is prohibited |
The reversal difference is significant. Under IFRS, if you wrote inventory down to NRV of $6 and market conditions improve to NRV of $9 (still below the original $12 cost), you reverse $3 of the write-down: debit Inventory and credit a reversal of the write-down expense. Under U.S. GAAP, the $6 becomes the permanent cost basis. For broader inventory adjustments beyond write-downs, see our guide on journal entries for inventory adjustments.
Tax Implications of Inventory Write-Downs
For tax purposes, inventory write-downs are generally deductible in the year they occur, but the rules are stricter than for book accounting. The IRS requires that inventory be valued at the lower of cost or market, but "market" is defined differently — as replacement cost, not NRV. Additionally, you cannot simply reserve for future write-downs; the IRS requires an actual reduction in value supported by evidence such as scrapping, selling below cost, or bona fide offering at reduced prices. A tax professional can help ensure your write-down methodology satisfies both book and tax requirements.
Key Takeaways
- Direct write-down: Debit COGS or Inventory Write-Down Expense, credit Inventory — simple and clear, appropriate for permanent impairments.
- Reserve method: Debit expense, credit Allowance for Inventory Obsolescence — preserves original cost data and is preferred for recurring adjustments.
- NRV formula: Estimated selling price minus costs to complete minus costs to sell — re-evaluate at each reporting date.
- GAAP vs. IFRS: U.S. GAAP prohibits reversal of write-downs; IFRS permits it up to original cost. This is one of the most significant GAAP/IFRS differences in inventory accounting.
- Tax treatment: Write-downs are deductible when evidenced by actual impairment — reserves alone aren't sufficient for IRS purposes.
