Physical inventory of perishable goods have a shorter shelf life. This expense includes the cost of capital and storage fees, both of which will need to be written down. The longer the unsold inventory stays in the warehouse, the higher the holding costs and more you’re at risk of carrying obsolete inventory (i.e., product that is no longer in demand). Apart from inaccurate demand forecasting, poor sales efforts can also result in a stockpile of dead stock. Many times, retailers tend to order too much inventory, based on a gut feeling, without taking projected future demand into consideration. Here are some of the most common reasons that can lead to an inventory write-down. What causes inventory write-downs?įrom ordering too much inventory to begin with, to a decline in demand, there are several reasons why inventory can lose its value. Inventory write-down is written down when an asset’s value depreciates but still holds some value, whereas a write-off is when an asset loses all of its value and must be removed from accounting records entirely. Note: You might have also heard the term “ inventory write-off,” which is very similar, but there’s a slight different. The write-down affects your business balance sheet and income statement, and it can cause a drop in net income, which, in turn, reduces the shareholder equity and retained earnings. When inventory loses partial value, it must be recorded as an inventory write-down expense on a company’s balance sheet, and it must be made as soon as possible to lessen tax liability.

What is an inventory write-down?Īn inventory write-down, also referred to as “inventory impairment,” is an accounting term that recognizes when your inventory’s market value falls below the book value, but it still considered sellable. In this article, learn what an inventory write-down entails, inventory accounting best practices, and how a 3PL like ShipBob can help you better track, manage, and report on your inventory. When this occurs, an inventory write-down is required to ensure you still end up with healthy profit margins. I t’s not uncommon to report a small loss due to inventory value depreciation. But, in the real world, things work a little differently. In an ideal scenario, when all your inventory gets sold at a net profit, you achieve maximum ROI. Running an online business, it’s important to keep value depreciation in mind when tracking, managing, and reporting on inventory. Unless it’s an original Picasso painting or a classic Chanel handbag, most tangible items lose their value over time.

Inventort writedown cash flow