Journal entry for an inventory write-off

The inventory write-off journal entry usually gets written in the first week of January, with the count sheets still on the desk. The count found what it always finds: a dozen hoodies that sat under a roof leak, a rack of last season’s jackets that will only sell at a markdown, and a few units nobody can account for. The books still carry all of it at full cost.

This post gives the entries for each of those cases, with one worked example carried through: removing stock that is gone or worthless, writing stock down to what it will sell for, and what happens when written-down stock finally sells. Then the QuickBooks Online steps for a file that tracks quantities and one that does not, and the tax rules that decide when the loss is deductible. How to run the count itself is in the year-end inventory count, and this post starts where that one ends.

What is an inventory write-off?

An inventory write-off removes the cost of stock that the business no longer has or can no longer sell. The goods are stolen, lost, destroyed, spoiled, expired or obsolete with no buyer at any price. Their cost comes off the balance sheet and becomes an expense in the period the loss is found.

An inventory write-down is the partial version. The goods still exist and will still sell, but for less than they cost. Only the drop in value is expensed, and the goods stay on the balance sheet at the lower figure.

	Write-off	Write-down
The goods	Gone, destroyed, or worth nothing	On hand and saleable, at a lower price
Amount expensed	Their full cost	Cost minus net realizable value
Quantity in the books	Reduced	Unchanged
Typical cause	Theft, breakage, spoilage, expiry, count shortage	Damage, style change, obsolescence, falling prices

Shrinkage, the gap between the books and the count when the cause is unknown, is a write-off too. It usually gets its own account so the owner can see it separately from known damage.

The inventory write-off journal entry

Debit an expense account and credit Inventory Asset for the cost of the goods removed:

Account	Account type	Debit	Credit
Inventory Write-Offs	Cost of Goods Sold	cost of goods
Inventory Asset	Other Current Assets		cost of goods

That is the double entry for inventory written off: the asset goes down, and an expense goes up by the same amount.

Which expense account. Both common choices are right; they differ only in where the loss shows on the profit and loss.

• A cost of goods sold account (Inventory Write-Offs, or Inventory Shrinkage for count shortages). The loss lands above gross profit, which is where most small businesses want it: damaged and missing stock is part of the cost of selling stock. QuickBooks Online’s own inventory adjustments post here.
• A separate expense or loss account below gross profit. Larger companies use this for a material, unusual loss, a warehouse fire for example, so it does not distort gross margin. If you do this, say so in the notes the CPA reads.

Whatever you pick, keep using it. A write-off coded to Cost of Goods Sold one year and Miscellaneous Expense the next makes gross margin incomparable across years.

The inventory write-down journal entry

A write-down uses the same debit, but only for the loss in value. The credit depends on the file:

Account	Account type	Debit	Credit
Inventory Write-Offs	Cost of Goods Sold	cost minus net realizable value
Inventory Valuation Allowance	Other Current Assets		cost minus net realizable value

Inventory Valuation Allowance is a contra-asset: it carries a credit balance that sits under Inventory Asset and reduces it on the balance sheet. In a QuickBooks Online file that tracks item quantities, crediting it instead of Inventory Asset is what keeps the item records and the ledger in agreement, for reasons covered in the QuickBooks section below. In a file without quantity tracking, you can credit Inventory Asset directly.

How much to write down: lower of cost and net realizable value

Under US GAAP, inventory measured on FIFO or average cost “shall be measured at the lower of cost and net realizable value” (ASC 330-10-35-1B, from ASU 2015-11). Net realizable value is the estimated selling price in the ordinary course of business, “less reasonably predictable costs of completion, disposal, and transportation.” When it is below cost, the difference “shall be recognized as a loss in earnings in the period in which it occurs.”

Write-down = (Cost per unit − Net realizable value per unit) × Units affected

Businesses on LIFO or the retail method still use the older lower-of-cost-or-market test, which ASU 2015-11 left in place for them.

Two rules matter afterward:

• No write-ups. Under US GAAP, “reversals of write-downs are prohibited” (PwC Viewpoint, IFRS and US GAAP: similarities and differences). If the jackets’ price recovers next season, the books stay at the written-down amount. IFRS allows a reversal; US small businesses are almost never on IFRS.
• Item by item is the safe default. US GAAP lets the test be applied to each item, to a major category, or to the inventory as a whole, whichever most clearly reflects income (ASC 330-10-35-8). A whole-warehouse test lets profitable lines hide the loss on others, and the tax rule for lower of cost or market is item by item, so most small businesses test the goods that lost value one item at a time.

A worked example: one count, two problems

The example continues from the year-end inventory count. An apparel shop counted on December 31, 2026, posted $451.00 of shrinkage for four items that came up short, and ended with $12,000.00 of stock on the shelves. Two things on the count sheets need a second entry.

Water-damaged stock. Of the 64 HD-200 hoodies counted, 12 were under a roof leak and are ruined. They cost $22.00 each, and they go in the dumpster on January 4. That is a write-off:

Date	Account	Account type	Debit	Credit
Dec 31	Inventory Write-Offs	Cost of Goods Sold	264.00
Dec 31	Inventory Asset	Other Current Assets		264.00

Last season’s stock. Of the 84 JK-300 jackets, 40 are last season’s version, since replaced by a new design. They cost $41.00 each. The owner listed them at $25.00 on December 15 and they are still listed at that price in January, and each one sold costs about $3.00 in packaging, shipping and marketplace fees, so net realizable value is $22.00. That is a write-down of $19.00 a jacket:

Write-down = ($41.00 − $22.00) × 40 = $760.00

Date	Account	Account type	Debit	Credit
Dec 31	Inventory Write-Offs	Cost of Goods Sold	760.00
Dec 31	Inventory Valuation Allowance	Other Current Assets		760.00

After both entries, the balance sheet shows inventory of $10,976.00 ($12,000.00 − $264.00 − $760.00): Inventory Asset at $11,736.00 less the $760.00 allowance. Cost of goods sold for 2026 carries $1,475.00 of inventory losses: $451.00 of shrinkage, the $264.00 write-off and the $760.00 write-down.

Both are dated December 31 even though they are posted in January, because the damage and the price drop existed at year end. The count sheets, photos of the damaged stock and the markdown price list go in the attachments.

When the written-down stock sells

In February 2027 the shop sells 30 of the old jackets at $25.00. QuickBooks Online posts cost of goods sold at the item’s recorded cost, $41.00 each, or $1,230.00. Their written-down cost is $22.00 each, or $660.00, so $570.00 of the allowance (30 × $19.00) is released against cost of goods sold:

Date	Account	Account type	Debit	Credit
Feb 28	Inventory Valuation Allowance	Other Current Assets	570.00
Feb 28	Cost of Goods Sold	Cost of Goods Sold		570.00

Cost of goods sold for the 30 jackets is now $660.00, the written-down cost, and 2027 does not take the 2026 loss a second time. The allowance keeps $190.00 for the 10 jackets still on hand. Release it the same way as they sell, or write them off if they end up donated or scrapped. A monthly release, done with the month-end close, is enough.

Recording an inventory write-off in QuickBooks Online

How the entries get in depends on whether the file tracks item quantities. Quantity tracking is on QuickBooks Online Plus and Advanced (Intuit: adjust inventory quantity on hand, updated August 5, 2026). Simple Start and Essentials keep one inventory balance.

Write-offs in a file that tracks quantities

Use an inventory quantity adjustment, not a journal entry. A journal entry credited to Inventory Asset moves the ledger balance but leaves every item’s quantity where it was, so the Inventory Valuation Summary and the balance sheet disagree from that day on. The inventory journal entry post explains why.

1. Create an account named Inventory Write-Offs if you want damage kept apart from shrinkage: Settings, then Chart of accounts, then New, with Account Type Cost of Goods Sold.
2. Select + Create, then Inventory qty adjustment.
3. Set the Adjustment date to December 31, 2026.
4. In Inventory adjustment account, choose Inventory Write-Offs (or Inventory Shrinkage for unexplained count shortages).
5. Find HD-200 and enter the new quantity, 52, or a change in quantity of −12.
6. In Memo, write what happened, for example “12 hoodies water-damaged, roof leak, disposed Jan 4,” and select Save and close.

QuickBooks writes the debit to the adjustment account and the credit to Inventory Asset, and updates the item’s quantity in the same step. It values the removed units at its own cost layers, so the posted amount can differ by a few cents from the count sheet when an item was bought at more than one price. Intuit describes how QuickBooks Online assigns those costs, first in first out by default, in What is FIFO and how is it used for inventory cost accounting? (updated August 14, 2026).

Write-downs in a file that tracks quantities

QuickBooks Online has no screen for lowering an item’s value while keeping its quantity. The inventory quantity adjustment changes quantities only, and Intuit’s article on it does not cover value. A write-down there is a journal entry, and it must not touch Inventory Asset:

1. Create Inventory Valuation Allowance: Account Type Other Current Assets, Detail Type Other Current Assets.
2. Select + Create, then Journal entry, dated December 31, 2026. Debit Inventory Write-Offs $760.00, credit Inventory Valuation Allowance $760.00.
3. In the memo, name the item, the units and the calculation: “JK-300, 40 units, cost $41 less NRV $22.” Attach the price list.

The Inventory Valuation Summary will keep showing the jackets at $41.00 each. The difference between it and the balance sheet should always equal the allowance balance, and the memo on each entry says which items make it up. When the jackets sell, the release entry from the worked example takes the allowance down.

Files without quantity tracking

In Simple Start or Essentials, Inventory Asset is adjusted to the count by journal entry once a year, as the count post shows. Value the damaged and slow stock at its lower figure on the count sheets, and the adjustment that brings Inventory Asset to the count includes the write-off and the write-down in one entry. Write them as separate lines debiting Inventory Write-Offs when you want the losses visible apart from ordinary cost of goods sold.

Is an inventory write-off tax deductible?

Usually yes, but the tax deduction does not always come in the same year as the book entry. The rules below are federal and apply to every entity type that keeps inventories: sole proprietors report cost of goods sold in Part III of Schedule C, and corporations and partnerships on Form 1125-A. Ledgerbrook keeps books and does not prepare returns; give the CPA the list of what was written off and why.

Goods that are gone. Stock that was destroyed, scrapped, stolen or lost is not in the closing inventory, so its cost flows into cost of goods sold and reduces taxable income that way. For casualty and theft, IRS Publication 538 says the loss is claimed “through the increase in the cost of goods sold by properly reporting your opening and closing inventories,” and “you cannot claim the loss again as a casualty or theft loss” (Pub. 538, rev. January 2022). Keep the evidence: photos, the disposal or recycling receipt, a police report for theft, and the date.

Goods written down but still on the shelf. Treasury Regulation §1.471-2(c) lets goods that are “unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes” be valued at their bona fide selling price less the direct cost of disposing of them. The regulation defines that price as an “actual offering of goods during a period ending not later than 30 days after inventory date” (26 CFR §1.471-2). The jackets in the example qualify, because they were on sale at $25.00 through that window and the listing history proves it. Stock the owner thinks is worth less, but still offers at full price, does not.

The Supreme Court applied that rule in Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979). Thor wrote down “excess” parts while keeping them in inventory and selling them at original prices, and the Court upheld the IRS’s disallowance of the write-down. The same regulation, in paragraph (f), lists “deducting from the inventory a reserve for price changes, or an estimated depreciation in the value thereof” as a practice that does not meet the inventory rules. A general obsolescence reserve, booked as an estimate and not tied to goods offered at a lower price or disposed of, is a book entry the return usually adds back.

Lower of cost or market. For tax, a business can value inventory at cost, or at the lower of cost or market item by item. Goods on LIFO are the exception: Pub. 538 says they “must be inventoried at cost.” Schedule C line 33 asks which method you use, and changing it is a change in accounting method that generally needs Form 3115.

Small businesses under §471(c). A business that meets the §448(c) gross receipts test can use a simpler inventory method, including one that follows its books and records, as the inventory journal entry post explains. Whether a book write-down then follows into the return depends on which method the business has adopted, which is a question for the preparer before year end.

Common questions about inventory write-offs

Can you write off inventory as an expense?

Yes, once it is gone or worthless. The cost moves from Inventory Asset to an expense, usually a cost of goods sold account. Inventory that is simply slow to sell stays an asset at cost unless it will sell for less than cost; then only the difference is expensed, as a write-down.

What is the journal entry for a write-off?

For inventory: debit Inventory Write-Offs or Inventory Shrinkage, credit Inventory Asset. A customer invoice that will never be paid is a different write-off, against Accounts Receivable, covered in the bad debt journal entry. Equipment that is scrapped is a third, covered in disposal of an asset.

Is an inventory write-down an expense?

Yes. It is a loss recognized in the period the value falls, normally inside cost of goods sold. It reduces gross profit for that year and lowers the cost that is expensed when the goods later sell.

How do you write off obsolete inventory?

If it will never sell, dispose of it, keep the proof, and write it off with an inventory quantity adjustment to Inventory Write-Offs. If it will sell at a markdown, offer it at the lower price, write it down to net realizable value, and release the write-down as it sells.

What if the inventory is donated instead of thrown away?

The goods still leave Inventory Asset, but the tax deduction is limited. For a sole proprietor, IRS Publication 526 caps the deduction for donated inventory at the smaller of its fair market value or its cost, and that amount “isn’t part of the cost of goods sold,” so the same cost is not deducted twice. Inventory bought and donated in the same year gets no charitable deduction; its cost stays in cost of goods sold. Corporations have their own rules. Record the donation with a quantity adjustment to a separate account, such as Inventory Donated, and give the CPA the receipt from the charity.

Where does an inventory write-off go on the income statement?

In cost of goods sold, above gross profit, for most small businesses. A large, unusual loss can be shown as a separate line below gross profit instead, as long as the business does it the same way every year.

Can a written-down item be written back up?

Not under US GAAP. The written-down figure becomes the item’s cost for later periods, and a price recovery shows up only as a higher margin when the goods sell.

When the count and the books have not agreed for years

The entries in this post assume Inventory Asset agreed with a count a year ago. When it has not been tied to a count in two or three years, the difference between the books and the shelves is not a write-off. It is purchases coded to expenses, sales recorded without items, negative quantities and an opening balance that was never set up, and writing it all off at once books several years of errors as one year’s loss. The journal entry reference has the rest of the series; cleanup rebuilds the inventory records month by month first, so the write-off that is left is a real one.

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When to hand this off: if the count is off from the books by more than the business’s normal shrinkage, or Inventory Asset has not been tied to a count in more than a year, the error sits in months already closed. A free file review finds where it started before anything is written off, and QuickBooks cleanup has the full scope.