An inventory write-off takes stock that is gone or worth nothing off your books at its full cost, as an expense. IFRS books the loss in the period it happens, so a shop on monthly accounts records it that month. It covers stock that was lost, stolen, destroyed or expired, and will fetch nothing.
Stock that still sells, even below cost, is a write-down instead. This guide follows one Kampala minimarket's month of losses to the journal entry, the tax effect and the ArmPOS steps, in Ugandan shillings.
Write-off, write-down, reserve or "depreciation"?
Ask one question first: will anyone pay for it? If not, write it off. If yes, but for less than it cost, write it down.
The four names people use for lost stock value are four different things in the books.
| 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. |
Goods that will fetch anything at all, even as scrap or animal feed, are written down to that amount, not written off. A write-off is for the nil cases only.
When to write off inventory
Write stock off once it has left your hands, or can no longer be sold or used, and nothing can be recovered from it. Record it in the month you find out, and keep the evidence with the entry.
| Cause | How you find it | Check before writing it off | Evidence to keep |
|---|---|---|---|
| Expired goods | The expiry list or a shelf check | Ask the supplier for a return or a credit note | Batch number, expiry date, a photo |
| Spoiled or broken goods | On the shelf, in the store room or on delivery | Whether any of it still sells as seconds or scrap | A photo and a note of what happened |
| Stolen or missing goods | A count that comes up short | Recount, then trace the movements since the last count | Count sheets, the recount, a police report after a break-in |
| Fire, flood or pests | After the event | Your insurance cover | Photos, the claim and a list of what was lost |
| Recalled or banned goods | A notice from the maker or a regulator | Whether the recall pays for returned goods | The notice and the return note |
Missing stock needs the most care. A shortfall is often a delivery never entered or a sale under the wrong product, so trace it first, as inventory reconciliation shows. What stays unexplained is inventory shrinkage, and you write it off.
Book each loss in its own period. IAS 2 makes "all losses of inventories" an expense of the period the loss occurs (paragraph 34). A loss found in October goes into October, not into a year-end clean-up.
Let someone other than the person who reports the loss approve it. A storekeeper who can write off stock alone can hide theft as damage.
How to value a write-off: at cost, never at selling price
Write stock off at what it cost you, not at what you would have sold it for. Cost is the purchase price plus transport, clearing and duty, worked out by FIFO or weighted average (IAS 2, paragraphs 10 and 25).
The lost profit hurts, but it was never in your books. Writing off at the selling price would take more out of inventory than you ever put in.
If the goods were written down earlier, write off what is left of them: their value after the write-down, not the original cost.
The journal entry for an inventory write-off
The entry debits an expense and credits inventory by the same amount. Keep one expense account for all stock losses, so the year's total is one figure your accountant can find.
| Account | Debit | Credit |
|---|---|---|
| Inventory losses (an expense) | Cost of the goods lost | |
| Inventory (an asset) | Cost of the goods lost |
Two variations are common:
- Small, routine losses can sit inside cost of goods sold. Show them on their own line when they are large, because IFRS requires material items of expense to be shown separately (IAS 1, paragraph 97).
- If you hold an inventory allowance against these goods, use it first. Debit the allowance for the part already provided, debit inventory losses for the rest, and credit inventory with the full cost.
A write-off is an operating cost, not a "non-operating" item, even when it is a one-off. It comes from running the shop.
Worked example: a Kampala minimarket's month of write-offs
For example, a minimarket in Kampala closes its October books with four losses. These are illustrative figures in Ugandan shillings, at cost, not a real shop's.
| Item | What happened | Recorded in ArmPOS as | Units | Cost each | Write-off |
|---|---|---|---|---|---|
| Yoghurt, 500 ml | Expired; the dairy takes no returns | A batch write-off | 48 | 3,200 | 153,600 |
| Cooking oil, 3 litres | Missing at the count; no cause found after a recount | An adjustment | 5 | 24,500 | 122,500 |
| Sugar, 1 kg | Soaked by a roof leak | A damage | 20 | 4,300 | 86,000 |
| Eggs, tray of 30 | A crate dropped in the store room | A damage | 4 | 12,000 | 48,000 |
| Total | 410,100 |
The minimarket posts one entry on 31 October: debit Inventory losses UGX 410,100, credit Inventory UGX 410,100. Its description lists the damage, adjustment and batch references, so every shilling traces back to a record.
| Where | Effect, UGX |
|---|---|
| Profit and loss | Inventory losses of 410,100, so profit before tax falls by 410,100 |
| Tax at 30% | Falls by 123,030, if the company pays Uganda's 30% rate |
| Profit after tax | Falls by 287,070 |
| Balance sheet | Inventory down 410,100; tax owed down 123,030; equity down 287,070 |
| Cash | No change today: the cash left when the goods were bought |
The balance sheet still balances: the 410,100 of stock that went equals 123,030 less tax owed plus 287,070 less equity. The only cash the write-off moves is the smaller tax bill, paid later.
In Uganda, the tax deduction for stock is the cost of trading stock disposed of: opening stock plus purchases, less closing stock (PwC, Uganda). Stock that is gone is not in closing stock, so its cost falls into that deduction.
A company with turnover of UGX 150 million or less pays presumptive tax unless it applies for the 30% rate (PwC). On presumptive tax, the write-off saves nothing. Inventory and taxes covers the rules further.
The losses also show what to fix. Two thirds of the money went on expired yoghurt and missing oil. Smaller yoghurt orders and a locked shelf for oil come first.
How to write off inventory in ArmPOS
ArmPOS takes the goods out of stock and keeps the record; the money goes into Accounting by a journal entry you post. Damages, adjustments and batch write-offs book nothing in Accounting by themselves.
- Broken or spoiled goods: open Damages › Create Damage, choose the Warehouse and the Date, and add each product with the Qty lost. Say what happened in Note and click Submit (Record damaged stock).
- Missing goods, after a recount: open Adjustment › Create Adjustment and enter the shortfall in Qty. Choose Subtraction and give the reason in Note (Count and adjust stock). Record the same goods as a damage or an adjustment, never both.
- An expired batch: in Products › Batches, click Write Off on the batch's row and give a reason. It removes what is left of that batch from stock (Batches and expiry dates).
- Value the loss at cost: Reports › Inventory Valuation shows each product's Cost, and the Stock Adjustment Report gives each adjustment's cost (Stock reports).
- Post the entry, if your plan includes Accounting. Add an account in Accounting › Chart of Accounts, such as Code 5110, Name Inventory losses, Type Expense.
- Then open Accounting › Journal Entries, click Create, and debit 5110 and credit 1200-INV Inventory. Check the badge says Balanced, click Save, and post it with the check icon (The chart of accounts and journal entries).
- Without Accounting, give your accountant the damages list, exported to PDF or Excel, and the Stock Adjustment Report each month.
ArmPOS doesn't mark a batch expired by itself or stop it being sold, so check the Expiry Report every week. A batch you set to Quarantined stays out of every sale while you decide.
Post each loss once. If you bring 1200-INV to the Inventory Valuation total at month end, losses posted during the month are already out of both figures. Post them as they happen, or split them out of that entry, so they never hide inside the cost of goods sold.
See what ArmPOS includes for shops in Uganda.
Frequently asked questions
Is an inventory write-off an expense?
Yes. IAS 2 makes it an expense of the period the loss happens. It usually sits in cost of sales, or on its own line when large.
Is an inventory write-off tax deductible?
Usually, through the deduction for the cost of stock, but each country sets its own rules. In Uganda, stock that is gone drops out of closing stock, so its cost is deducted. Keep the evidence in case the tax office asks.
What is the difference between a write-off and a write-down?
A write-off takes stock to nil because nobody will pay for it. A write-down cuts it to what it will still sell for, less the costs of selling it.
Can you reverse an inventory write-off?
Only if the goods turn up, for example in another branch: then reverse the adjustment and the journal entry. Goods that were destroyed stay written off, while a write-down reverses if the price recovers.
Is inventory still an asset after a write-off?
The written-off goods are not: they leave the balance sheet. The rest of your stock stays a current asset, as is inventory an asset explains.
Gather this month's damages, expired batches and count shortfalls, value them at cost and post one entry. To record each loss with a note and a reference your accountant can trace, create a free ArmPOS account.
