An inventory write-down cuts the value of stock that will sell for less than it cost, down to its net realisable value. That is the expected selling price, less the costs to finish and sell it. IAS 2 requires it, because stock must never sit in the books above what it will bring in.
The stock stays on your books at the lower figure, and the cut is an expense of the period. This guide works the calculation line by line for a Lagos phone shop, in naira. It then shows the entry, the reversal and the ArmPOS steps.
Write-down, write-off, reserve or "depreciation"?
A write-down is for stock that still sells, but for less than it cost. Stock nobody will pay for is written off instead.
| 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. |
A markdown is not a write-down. Cutting a price at the till from NGN 30,000 to NGN 25,000 on goods that cost NGN 22,000 needs no entry. They still sell above cost.
What triggers an inventory write-down?
Anything that pushes the price you can get, less the cost of selling, below what you paid. IAS 2 names damage, obsolescence and falling prices, and adds rising costs of completing or selling (paragraph 28).
| Trigger | What happens to the price | Where you see it early in ArmPOS |
|---|---|---|
| Excess stock | You hold more than sells at full price, so the rest needs a discount below cost | Dead Stock Report, Stock Aging Report |
| Goods near expiry | They sell only at a discount before the date; past it, they are written off | Expiry Report, Near Expiry |
| Damaged stock | Dented, opened or faded goods sell only as seconds | A check on delivery and on the shelf |
| Obsolete stock | A new phone model, a new season or a new rule cuts what the old one fetches | Zero Sales Products Report |
| Falling market prices | Rivals cut prices, or a stronger naira makes imports cheaper to replace | Stock Inventory Valuation, at cost and at selling price |
| Higher costs to sell | Delivery, marketplace fees or repacking now eat into the price | Your own selling costs |
Excess stock does double damage. It costs money every month it sits, as the inventory holding cost example shows. Then it often needs a cut below cost to clear.
How to calculate an inventory write-down
Work out net realisable value for each line, compare it with cost, and write down the gap where value is lower. Lines worth more than cost stay at cost.
Net realisable value = expected selling price − costs to complete − costs to sell
Write-down = cost − net realisable value, when the answer is above zero.
Five rules from IAS 2 and the IFRS for SMEs Standard decide the answer:
- Go item by item, or by groups of similar items in one product line (IAS 2, paragraph 29). Never by a broad class such as "all finished goods".
- Don't net a line worth more than cost against a separate line worth less. The first line's gain isn't in the books, so it can't cancel the other's loss.
- Use the evidence you have at the reporting date, including sales just after it that confirm prices at that date (paragraph 30).
- Count only the costs the sale itself needs: delivery, commission, marketplace fees, repacking. Rent and general running costs are not costs to sell.
- Test again at every reporting date. The IFRS for SMEs Standard asks the same at "each reporting date" and calls the cut an impairment loss (paragraph 27.2).
Cost is your FIFO or weighted average cost, with transport and duty included. FIFO vs LIFO explains why LIFO is not allowed under IFRS.
Worked example: a Lagos phone shop's quarter-end write-down
For example, a phone and accessories shop in Lagos tests its stock on 30 September. These are illustrative figures in naira, not a real shop's.
| Line | Units | Cost each | Will sell for | Costs to sell each | Net realisable value | Write-down each | Write-down |
|---|---|---|---|---|---|---|---|
| Phone, model just replaced | 25 | 185,000 | 170,000 | 3,000 | 167,000 | 18,000 | 450,000 |
| Bluetooth speaker, damaged box | 12 | 28,000 | 24,000 | 1,500 | 22,500 | 5,500 | 66,000 |
| Phone cases, last year's models | 150 | 2,500 | 1,500 | 0 | 1,500 | 1,000 | 150,000 |
| Power bank, 20,000 mAh | 40 | 22,000 | 32,000 | 1,000 | 31,000 | None | 0 |
| Total | 666,000 |
The phones' costs to sell are a dispatch rider and a transfer fee. The speakers need new boxes at 1,500 each.
These four lines cost NGN 6,216,000, and they are now carried at NGN 5,550,000. The shop posts debit Inventory write-downs NGN 666,000, credit Inventory allowance NGN 666,000.
The power banks are worth NGN 360,000 more than they cost. Netting that against the other lines would give a write-down of only NGN 306,000. IAS 2 groups items only when they can't practicably be valued apart, and each of these lines can.
When an inventory write-down is reversed
Under IFRS, a write-down comes back when the price recovers, but never above the original cost. IAS 2 calls for a new assessment every period (paragraph 33), and section 27.4 of the IFRS for SMEs Standard says the same.
For example, by 31 December the Lagos shop has 10 of the 25 phones left. The naira has fallen, the new model costs more to import, and the old one now sells for NGN 195,000.
- Net realisable value: 195,000 − 3,000 = NGN 192,000, above the cost of 185,000.
- Reversal: the full NGN 18,000 per phone, so 10 × 18,000 = NGN 180,000.
- New value: NGN 185,000 a phone, the lower of cost and net realisable value. Never 192,000.
The entry is the first one in reverse: debit Inventory allowance NGN 180,000, credit Inventory write-downs NGN 180,000. It reduces that quarter's cost of sales (IAS 2, paragraph 34).
The 15 phones sold during the quarter left at their written-down value of NGN 167,000, so their write-down is used up. Only stock still held can be reversed.
If you hold the cut in an allowance, as the ArmPOS steps below do, the 31 December entry clears the phones' whole NGN 450,000. That is 270,000 for the phones sold and 180,000 for those reversed.
US GAAP is the exception. It treats the reduced amount as the new cost (ASC 330-10-35-14). The SEC staff adds that it cannot be marked up later (Staff Accounting Bulletin Topic 5BB).
How a write-down shows in your accounts
A write-down lowers profit in the period you book it and lowers the stock on your balance sheet by the same amount. It moves no cash.
- Profit: the cut usually sits in cost of sales. Show it apart when it is large, as IAS 1 asks for inventory write-downs and their reversals (paragraph 98).
- Later profit: when the stock sells near its written-down value, the sale shows little or no further loss. The loss is counted once, in the period it became clear.
- Balance sheet: inventory and equity both fall. Your notes give the amount written down and any reversal (IAS 2, paragraph 36).
- Cash: none moves. The cash left when you bought the stock.
- Lenders: banks that lend against stock look at its carrying value. Write-downs every quarter point to weak inventory control.
Tax is a separate rulebook. Nigeria sets no stock valuation rules of its own beyond the accounting rules, with FIFO common and LIFO not permitted (PwC, Nigeria). Ask your tax adviser when the cut is deductible, and see inventory and taxes.
How to record an inventory write-down in ArmPOS
ArmPOS shows you which stock to test and holds the cost; the write-down goes into Accounting by a journal entry you post. ArmPOS doesn't calculate or post it by itself.
- Find the candidates. In Reports, the Dead Stock Report lists what hasn't moved in 30, 60 or 90 days. The Stock Aging Report sorts what you hold by age, and the Expiry Report lists batches near expiry (Stock reports).
- Get the cost. Reports › Inventory Valuation gives each product's stock on hand and Cost.
- Get the price. The Product sales report shows what each line sold for recently (Sales reports). Take off the costs to sell and compare, line by line, in a spreadsheet.
- Add two accounts in Accounting › Chart of Accounts: 5120 Inventory write-downs, Type Expense, and 1210 Inventory allowance, Type Asset, Parent 1200-INV.
- Post the entry. In Accounting › Journal Entries, click Create, debit 5120 and credit 1210 with the total. Check it says Balanced, click Save, then post it with the check icon (The chart of accounts and journal entries).
- Each month end, work out the allowance the stock still held needs. Post only the difference, up or down.
Use the allowance, not 1200-INV. Inventory Valuation is always at cost, and the month-end entry that matches 1200-INV to it would undo a write-down posted there. The Balance Sheet takes the allowance's credit balance off your assets.
Leave each product's Cost in ArmPOS as bought. The write-down lives in the ledger, and the stock reports keep showing what the goods cost.
See what ArmPOS includes for shops in Nigeria.
How to reduce the risk of inventory write-downs
Most write-downs start at the buying stage, months before the test. Five habits keep them small:
- Sell the oldest first. Batches with expiry dates put the earliest-expiring batch at the top of the till's list (Batches and expiry dates).
- Buy to demand. Reorder points stop you buying a season's stock on a sales rep's visit (reorder points).
- Check the dead stock list monthly. A line with no sale in 90 days still has a price today that it won't have later (dead stock).
- Clear early. A small discount now beats a deep one next season, and inventory liquidation works out the lowest price worth taking.
- Store and handle with care, so fewer goods end up as seconds. Inventory depreciation covers each cause of lost value and its fix.
Frequently asked questions
Is an inventory write-down an expense?
Yes. IAS 2 makes it an expense of the period it happens, usually within cost of sales. A large one is shown on its own.
Can an inventory write-down be reversed?
Under IFRS and the IFRS for SMEs Standard, yes, when the price recovers, and only up to the original cost. Under US GAAP, no.
How often should you test stock for a write-down?
At every reporting date: each month end if you close monthly, and at least at the year end. Test sooner after a new model, the end of a season or a flood.
Does an inventory write-down affect cash flow?
No cash moves when you book it. The only cash effect is on tax, if the cut is deductible.
What is the difference between a write-down and a write-off?
A write-down cuts stock to what it will still sell for. A write-off takes stock to nil because it is gone or nobody will pay for it.
Pick your five slowest lines, find what each will really sell for today, and compare it with cost. To see dead stock, ageing and cost in one place, create a free ArmPOS account.
