Inventory depreciation is the value stock loses before it sells, through expiry, damage, a change of fashion or a newer model. In accounting, stock is never depreciated: IAS 2 carries it at the lower of cost and net realisable value. The loss is booked as a write-down or a write-off, and most of it can be prevented.
Stock doesn't lose value on a schedule. It loses it at events: an expiry date, the end of a season, a new model, a breakage.
This guide covers the four kinds, what they cost, and how to cut and book them, using a Johannesburg boutique's figures in rand.
Is inventory depreciated? What the term really means
No. Depreciation spreads the cost of a fixed asset, such as a fridge or a van, over its useful life.
Stock is measured at the lower of cost and what it will sell for. Its lost value goes into one of the other three entries below.
| Term | What it means | When it applies | The entry |
|---|---|---|---|
| Inventory write-off | Stock that is gone or worth nothing comes off the books at its full cost. | It was lost, stolen, destroyed or expired, and will fetch nothing. | Debit inventory losses (an expense), credit inventory. |
| Inventory write-down | Stock is cut from its cost to its net realisable value: what it will sell for, less the costs to sell it. | It will still sell, but for less than it cost. | Debit inventory write-downs (an expense), credit inventory or the inventory allowance. |
| Inventory reserve | An allowance account that holds the write-downs on stock still held, so the inventory account keeps showing cost. | You estimate the write-down for a group of similar items, or want cost and write-down shown apart. | Debit inventory write-downs, credit the inventory allowance. |
| "Inventory depreciation" | Not an accounting entry: stock is never depreciated. People mean value lost to expiry, damage, fashion or newer models. | Never as depreciation. Book the loss as a write-down or a write-off. | None of its own. |
The phrase is still worth understanding, because the loss behind it is real. It sits in the risk line of your inventory holding cost, next to rent and the interest on the money.
Types of inventory depreciation
Stock loses value in four ways, and each one has a different shape over time. Knowing the shape tells you when to act.
| Type | What causes it | How the value falls | The first sign |
|---|---|---|---|
| Physical | Expiry, spoilage, breakage, damp, heat, pests | All at once, at the expiry date or the accident | A batch near its expiry date; damaged goods on delivery |
| Market | Rivals' price cuts, a stronger local currency, weaker demand | In steps, each time the market price moves | Your price no longer sells at the usual pace |
| Obsolescence | A new phone model, a new season, a new rule or standard | In one drop, the day the replacement arrives | The supplier announces a new model; the season ends |
| Overstock | Buying more than sells before any of the above happens | Slowly, then fast, as the other three catch up with it | No sale in 60 to 90 days |
Physical loss is the one most shops see first. Medicine, dairy, cosmetics and drinks hold their value until close to the date on the pack, then lose it in days.
Market loss has an African twist. Stock imported while the rand, naira or shilling was weak can sell below cost once the currency strengthens. Rivals restock cheaper and cut their prices.
Obsolescence hits phones, electronics and fashion hardest. In southern Africa it follows the seasons the other way round from global articles. Winter coats lose value in September, not March.
Accounting depreciation: why it doesn't apply to stock
There is no accounting depreciation of stock. IAS 16 defines depreciation as spreading a fixed asset's cost over its useful life. Straight-line and declining balance are methods for fixed assets, not for goods you sell.
Stock follows IAS 2: the lower of cost and net realisable value (paragraph 9). Its losses are expenses of the period they happen (paragraph 34), whether as a write-down or a write-off.
Goods you rent out rather than sell are the exception. They are fixed assets, and they are depreciated, as inventory vs fixed assets explains.
How inventory depreciation affects businesses
Lost value hits profit in the month it becomes clear, not spread over the months before. The worked example shows why that timing matters.
For example, a boutique in Johannesburg buys 80 winter jackets in March at R520 each, R41,600 in all, to sell at R999. These are illustrative figures, not a real shop's. Winter in South Africa runs from June to August.
| Month end | Jackets left | Will sell for | Costs to sell each | Net realisable value | Cost | Write-down |
|---|---|---|---|---|---|---|
| 31 May | 60 | 999 | 0 | 999 | 520 | 0 |
| 31 July | 35 | 799, in the winter sale | 0 | 799 | 520 | 0 |
| 30 September | 30 | 399, in an online clearance | 20 marketplace fee | 379 | 520 | 141 each, R4,230 |
The jackets lost nothing on paper for five months, then R4,230 at once when spring came. A straight-line "depreciation" charge would have spread a loss over months when there was none, and missed the drop when it came.
The cheapest fix was earlier. Had the boutique cut the price to R799 in mid-July and sold 10 more jackets, it would have recovered R4,200 more: 10 × (799 − 379).
The loss reaches the business in five ways:
- Lower margins. The 30 jackets are now carried at R11,370 instead of R15,600, and the season's profit is R4,230 lower.
- Higher holding costs. Every month unsold adds rent, power and the cost of the money tied up.
- Cash tied up. R15,600 of the boutique's cash sits in 30 jackets until they sell.
- Write-offs. Whatever doesn't sell before next winter may end up worth nothing, and be written off.
- A weaker brand. Customers who see clearance racks every month learn to wait for them.
Strategies to minimize inventory depreciation
Most lost value is decided at the buying stage and in the weeks before an event, not on the day it happens. Six strategies cover the four kinds.
Buy closer to demand
Order from last year's sales for the same weeks, not from a sales rep's visit. Inventory forecasting methods turns those sales into a quantity, and reorder points stop overstocking between orders.
For imported seasonal goods, the lead time decides. Stock that clears Durban or Mombasa after the season starts has already lost part of its value, so order early or skip it.
Sell the oldest first
Put the earliest-expiring stock at the front and sell it first. For goods without a date, sell the oldest first, as in FIFO.
Just-in-time buying cuts stock only where suppliers deliver within days. With import lead times of weeks, it trades lost value for stockouts.
Cut prices early, not late
A small discount while demand lasts recovers more than a deep one after it. Plan the markdown dates when you buy: for seasonal goods, the first cut two to four weeks before the season ends.
Bundle a slow line with a best seller, and give every discount an end date. Inventory liquidation works out the lowest price worth taking once the season is over.
Store and handle with care
Keep goods off the floor, away from walls, out of the sun and away from damp, and check every delivery before you sign. How to make inventory more efficient gives the storage rules in centimetres.
Write any damage on the delivery note before you sign, so the supplier can't dispute it later.
Sell through more than one channel
An online shop, a marketplace or a trader in another town can sell what your counter can't. In South Africa, Takealot reaches buyers nationwide; in Nigeria and Kenya, Jumia and Jiji do. Check each one's fees first, because they come off your price.
Watch the signals in your system
Each kind of lost value shows in your records weeks before it hits: an expiry date, an age, a line that stopped selling. The ArmPOS reports below put them on one screen each.
Accounting and tax treatment of inventory depreciation
In the accounts, lost stock value is a write-down or a write-off, never depreciation. It is an expense of the period the value falls, and the write-down reverses if the price recovers before the goods sell.
South Africa's tax rule names the same causes. Section 22(1)(a) of the Income Tax Act values closing stock at cost, less any fall in value. The fall must come from "damage, deterioration, change of fashion, decrease in market value" or another reason SARS accepts.
SARS's Interpretation Note 140, its current guidance, sets the conditions:
- The fall must already have happened by the year end, not be expected later.
- It is measured against cost, item by item or by a fitting category, and a blanket percentage is rejected.
- You must show it with evidence, such as sales invoices near the year end.
- A value below cost must be disclosed in your tax return.
So the boutique's R4,230 counts for tax only if the jackets are still unsold at its year end, with the clearance price on record.
Other countries use their own wording. Uganda values closing stock for tax at the lower of cost or market value (PwC, Uganda). Inventory and taxes covers the rest.
Some global articles promise tax credits for donating unsold stock. Those are rules of particular countries, so ask your tax adviser before you count on one.
How to track and cut inventory depreciation in ArmPOS
ArmPOS shows each kind of lost value early and records what you do about it. It doesn't value the loss in Accounting by itself: that is a journal entry you post.
- Expiry: switch on Track batches & expiry on a product, and the till lists the batch expiring first at the top. The Expiry Report shows what expires within 90 days, a window you can change (Batches and expiry dates).
- Expired batches: ArmPOS doesn't mark a batch expired or stop its sale. Write it off, or set it to Quarantined, from Products › Batches.
- Age and slow sellers: the Stock Aging Report sorts what you hold by age. The Dead Stock Report lists what hasn't moved in 30, 60 or 90 days (Stock reports).
- Markdowns with an end date: on plans with Promotions, discount Specific products with an Ends at date, for the warehouses you tick. Promotions work at the POS and on Add sale, not in the online store (Promotions and promo codes).
- Clearance online: if your plan includes the online store, put the lines in a collection on its home page (Collections and banners).
- The branch that sells it: a transfer moves stock to another warehouse once someone with permission approves it (Move stock between warehouses).
- Back to the supplier: if the supplier agrees, a purchase return removes the goods from stock. It records what the supplier owes you (Return goods to a supplier).
- The loss itself: record spoiled goods as a damage (Record damaged stock), and post the value as a write-off or write-down journal entry.
See what ArmPOS includes for shops in South Africa.
Frequently asked questions
Can you depreciate inventory?
No. Stock is held at the lower of cost and net realisable value, and only fixed assets are depreciated. Goods you rent out are fixed assets, so those are.
How do you calculate inventory depreciation?
You calculate a write-down instead: cost less net realisable value, item by item, at each reporting date. A line worth more than its cost stays at cost.
Is inventory depreciation tax deductible?
The fall in value usually is, as a write-down or a write-off under each country's stock rules. South Africa allows it under section 22(1)(a), item by item and with evidence.
Is obsolescence the same as inventory depreciation?
Obsolescence is one cause of it: a newer model or a new rule cuts what old stock fetches. Expiry, damage and falling market prices are the others.
Does inventory lose value over time?
Not steadily. It loses value at events: an expiry date, the end of a season, a new model or a breakage. That is why dates and ages are worth watching.
List the stock that expires, goes out of season or gets replaced in the next 90 days, and set a markdown date for each line. To see expiry dates, ages and dead stock in one place, create a free ArmPOS account.
