Writing off inventory isnât fun, but itâs part of running a smart business. Youâll need to determine the loss, calculate its total value, record it in your accounting system, and analyze why it happened so it doesnât happen again. Whether itâs damaged, stolen, or expired stock, learning how to write off inventory properly keeps your books clean, your taxes accurate, and your warehouse running smoothly.
Every brand that deals with physical products eventually faces the same gut-punch moment: realizing some of your inventory is worth zilch. It happens. Maybe a pallet of candles melted during a heatwave (seriously, check out our guide to temperature-controlled warehousing), or maybe those 2023 planner covers didnât exactly âage well.â
Whatever the reason, writing off inventory means acknowledging the loss, documenting it, and making peace with the fact that some items just didnât survive the journey. But donât panic, this guide will walk you through how to write off inventory step by step, using simple terms and real-world examples so your accountant doesnât have to translate.
Before we get into the nitty-gritty, itâs worth remembering that inventory write-offs connect directly to how efficiently your ecommerce warehouse is managed. Better systems mean fewer surprises at audit time, fewer misplaced SKUs, and fewer sleepless nights wondering if your stockroom is secretly eating your profits.
An inventory write-off happens when products in your possession lose all value and canât be sold, repaired, or repurposed. Itâs the accounting way of saying, âThis stuffâs done.â Think of it as hitting the delete button on unusable goods.
Businesses typically write off inventory because of:
When these happen, companies reduce the value of their inventory in financial statements to reflect reality. Itâs both a loss acknowledgment and a step toward cleaner accounting.
Want to see how this fits into the bigger picture? Our blog on inventory vs. stock breaks down the difference and how each impacts your business balance sheet.
If you ignore dead stock, your financial reports will lie to you. Plain and simple. Overstating inventory means overstating profits. That can lead to bigger tax bills, poor forecasting, and bad decision-making.
A write-off is basically an honest conversation with your accountant, it ensures your books match whatâs actually in your warehouse shipping operations.
When you regularly audit and write off damaged or obsolete inventory, you also uncover weak points in your supply chain. Maybe your pick and pack warehouse needs tighter quality control. Maybe your vendors need clearer packaging requirements. Whatever the cause, regular write-offs are like diagnostics for your fulfillment health.
Not every product glitch deserves a full write-off. Some can be repaired, repackaged, or discounted. But certain scenarios definitely qualify:
If youâre selling food, skincare, or nutraceutical products (see nutraceutical fulfillment), expiration dates are non-negotiable. Once the clock runs out, the value drops to zero.
Maybe a forklift mishap turned your boxes into modern art. If products canât be safely sold or repaired, itâs time to write them off. This also applies to inventory that arrives damaged from suppliers or shipping carriers (see our delivery exception guide).
Inventory theft happens. Whether through vendor mistakes, employee error, or shipping miscounts, youâll need to reconcile these losses. A strong warehouse management system helps prevent repeat offenders.
If your product line changes, say, last seasonâs hoodie gets replaced by a new design, old versions may no longer sell. Writing them off keeps your fashion fulfillment clean and your data relevant.
Now for the process itself. Writing off inventory involves five essential steps:
Start with an accurate assessment. Inspect your warehouse, review records, and verify whatâs actually unsellable.
This is where your ecommerce warehouse management system earns its keep. It should help you track product conditions and quantities in real-time. Document everything, photos, SKUs, quantities, and reasons for the write-off.
Assign a value to the loss by multiplying each productâs cost by its quantity. Use cost price, not retail price. This ensures your accounting reflects actual financial impact.
If youâre running a Shopify fulfillment business, you can pull this data directly from your inventory dashboard or connected ERP system.
Youâll need to create an inventory write-off account in your general ledger. This adjusts your balance sheet so it no longer reflects unusable goods. Your accountant might call it a âCOGS adjustment,â but donât let the jargon scare you, itâs just documenting the loss in the right place.
Your Cost of Goods Sold (COGS) increases, while your inventory value decreases. Itâs the accounting version of âone in, one out.â Youâre acknowledging that the goods cost money but no longer generate revenue.
Hereâs the part most companies skip, and regret later. Once the write-off is logged, figure out why it happened. Damaged during transport? Stolen during shift change? Miscounted at intake?
Identifying root causes helps reduce future losses, especially if youâre using multiple fulfillment channels like Amazon FBA prep or BigCommerce fulfillment.
Inventory write-offs donât just clean up your shelves, they impact your bottom line.
For most ecommerce brands, the challenge is timing. You donât want to write off too soon (what if a buyer appears?), but you also donât want to wait until auditors find it for you.
Letâs be real, most write-off errors come from guesswork. Hereâs what to avoid:
Your goal should be to balance precision with consistency. Clean data in equals clean books out.
Hereâs the good news, you can reduce write-offs dramatically with the right systems.
Use data analytics (and a little common sense) to predict demand. Our post on supply chain formulas walks you through methods to anticipate stock needs and prevent overordering.
Use the FIFO method (First In, First Out) to ensure older inventory moves first. This reduces the risk of expiration, especially in industries like subscription box fulfillment.
Consider temperature-controlled warehousing for perishables or humidity-sensitive products. Even a few degrees can mean the difference between pristine and unsellable.
When certain SKUs stop selling, repurpose them through kitting and fulfillment services. Bundling old stock with new items creates value instead of waste.
Perform routine audits and compare physical counts with digital records. Itâs like checking your fridge before grocery shopping, prevents doubling up and wasting money.
Letâs make this practical. Here are a few examples you might encounter:
A batch of ceramic mugs cracks during shipment from your supplier. You record the damaged quantity, calculate cost loss, and log it in your expense account.
Last yearâs Bluetooth speakers become outdated. You mark them as obsolete and write them off. Bonus: you use the components in a future product kit.
If you run apparel fulfillment, you might experience shrinkage. Use CCTV footage and inventory audits to verify losses before logging the write-off.
For companies in wellness or food, expired goods are a fact of life. Writing them off regularly keeps your accounting (and compliance) squeaky clean.
ShipBots clients donât just get storage space, they get smarter logistics. Our ecommerce fulfillment guide shows how our systems track inventory in real-time, prevent overstocking, and flag damaged or lost items before they snowball into major write-offs.
From 3PL kitting services to advanced warehouse management, every piece of tech we use is built to minimize risk and maximize efficiency.
We also help businesses running Shopify fulfillment, WooCommerce fulfillment, or Walmart fulfillment sync all inventory data seamlessly across platforms.
Disposing of unusable inventory doesnât have to mean landfill waste. Explore how we integrate sustainability into fulfillment operations, from recycling packaging to repurposing materials through donation partnerships.
Incorporating sustainability practices into your write-off process isnât just eco-friendly, itâs brand-friendly. Consumers increasingly reward companies that care about reducing waste.
Inventory write-offs might not be glamorous, but theyâre part of the real-life business grind. Understanding how to write off inventory correctly protects your financial health and helps you see whatâs working, and whatâs not, inside your warehouse.
And if youâd rather not deal with all that manual reconciliation yourself? ShipBots can handle it for you. We streamline fulfillment, protect against inventory losses, and give you the real-time insights you need to stay ahead.
đ Get an instant quote and letâs keep your inventory (and your sanity) intact.
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