Inventory write-off and write-down: journal entries, the tax rule, and recording it on Shopify
A write-off removes stock that is gone or can't be sold: lost, stolen, damaged beyond sale or expired. A write-down lowers the value of stock you still hold because it is worth less than it cost. Both are usually debit Cost of goods sold (or an inventory loss expense), credit Inventory, in the period it happens. Example: 12 damaged units at an average cost of $9.49 is a $113.88 write-off. For US taxes, an inventory loss reaches your return through cost of goods sold, by reporting opening and closing inventory correctly.
Write-off or write-down
| Write-off | Write-down | |
|---|---|---|
| What happened | Stock is gone or can't be sold: lost, stolen, damaged beyond sale, expired | Stock is still there but worth less than it cost |
| Units on hand | Go down | Stay the same |
| Value | Removed at its cost | Lowered to net realisable value, or market value for US taxes |
| When | When it happens or is found | At each reporting date when value falls below cost |
Journal entries
Write-off of 12 damaged units at an average cost of $9.49:
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold (or Inventory loss expense) | $113.88 | |
| Inventory | $113.88 |
Write-down: the same two sides, for the amount by which the value falls below cost. Some businesses credit an inventory reserve instead of Inventory for expected obsolescence. IAS 2 recognises a write-down and any loss of inventory as an expense in the period it occurs (IAS 2).
Stock worth less than cost: NRV and market
- IAS 2: inventories are measured at the lower of cost and net realisable value: the estimated selling price less the costs to complete and sell (IFRS Foundation).
- US tax, lower of cost or market: compare each item's market value on the inventory date with its cost and use the lower, item by item (IRS Publication 538).
The IRS example values three items, item by item:
| Item | Cost | Market | Lower |
|---|---|---|---|
| R | $300 | $500 | $300 |
| S | $200 | $100 | $100 |
| T | $450 | $200 | $200 |
| Total | $950 | $800 | $600 |
You can't take the lower of the two totals ($800); each item is valued separately, giving $600. LIFO inventory must stay at cost.
The tax rule for lost or stolen stock
For US taxes, you claim a casualty or theft loss of inventory through cost of goods sold, by reporting your opening and closing inventory correctly, and you can't claim it again as a casualty loss. You can instead claim it separately, after removing the items from opening inventory or purchases. Insurance or other reimbursement is taxable (IRS Publication 538). Ask your accountant which way suits you.
Recording it on Shopify
- Lower the quantity on the Inventory page, with a preset reason such as damaged (Shopify Help). The adjustment appears in the Inventory adjustment changes report.
- Shopify records the units, not their cost. Month-end inventory value simply falls; no report shows the loss in dollars, and profit reports only cover sales.
- So record the cost yourself: units × the cost you paid for them, by reason, each month.
How True COGS fits
- Stock loss, under Reports, on every plan: record units that left without a sale with a reason (damaged, expired or out of date, theft or unexplained, miscount correction, sample or giveaway, staff use, returned not restocked, returned to supplier), at what they cost on the day they went.
- It does not change quantities: you lower them in Shopify, and the page says so first.
- The month-end close lists declared losses on a line of their own. The CSV export is on paid plans.
Related guides
Questions merchants ask
What is the journal entry to write off inventory?
Debit Cost of goods sold, or an inventory loss expense if you report losses separately, and credit Inventory, for the cost of the units written off.
What is the difference between a write-off and a write-down?
A write-off removes stock that is gone or worthless. A write-down keeps the stock on the books but lowers its value, because it is worth less than it cost.
When should inventory be written down?
When it is worth less than cost. IAS 2 measures inventories at the lower of cost and net realisable value; for US taxes, the lower of cost or market method compares each item's cost with its market value on the inventory date.
Can I deduct lost or stolen inventory?
Under the IRS rule, a casualty or theft loss of inventory is claimed through cost of goods sold by reporting opening and closing inventory correctly, or separately as a casualty or theft loss, but not both. Insurance or other reimbursement is taxable.
Is inventory shrinkage part of cost of goods sold?
Usually. Stock that leaves without a sale lowers ending inventory, so it ends up in cost of goods sold unless you record it in a separate loss account.
How do I write off inventory in Shopify?
Lower the quantity in Shopify with an adjustment reason such as damaged. Shopify does not record what those units cost, so record the cost in your books or in a costing app.
Try True COGS free. True COGS is an inventory costing app for Shopify by Nexus Logic Systems. It records the price you paid on every delivery (a received purchase order or a transfer), with its share of freight and duty on paid plans, keeps every price with its date, and writes your moving weighted average cost, or FIFO cost on a paid plan, to Shopify's Cost per item. It is free for up to 25 variants with a cost on record; paid plans start at $29 a month or $290 a year.
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