Inventory Write-Offs: When, How, and How to Have Fewer
An inventory write-off removes stock from your books once it can no longer be sold — lost, damaged, obsolete or stolen. Most guides stop at the accounting entry. This one joins the entry to the operational causes and, more usefully, to how you have fewer write-offs next year.
An inventory write-off removes the cost of stock from the balance sheet when that stock can no longer be sold or used: it has been destroyed, has expired, has gone missing or has no realistic buyer at any price. The inventory asset falls, an expense of the same amount is recognised, and profit for the period falls with it. No cash moves at that point, because the cash went out when the stock was bought.
The entry itself is two lines. The practical problem is everything around it: who decides that stock is worthless, what evidence proves it, whether a partial write-down would be more accurate, which account the loss goes to and whether the physical stock has actually left the shelf. When those steps are informal, write-offs arrive as a year-end surprise, approvals are hard to trace and the stock record keeps showing units that nobody can sell.
Every write-off starts with physical stock that someone has inspected, counted or failed to find. Illustrative photograph, not an OpsMavix project.
Image credit: Tima Miroshnichenko, Pexels License. No edits.
Key Takeaways
- An inventory write-off removes the full cost of stock that has no remaining value; a write-down reduces cost to a lower recoverable amount.
- FRS 102 measures inventories at the lower of cost and estimated selling price less costs to complete and sell; IAS 2 uses net realisable value.
- A sound process separates identification, investigation, approval, posting and physical disposal, with a named owner for each step.
- Approval limits and evidence packs make each write-off traceable to a person, a reason and the stock record.
- Tax deductibility and VAT treatment depend on the facts, so finance or your accountant should confirm them before you rely on them.
- The aim is not zero write-offs; it is write-offs that are recognised promptly, approved properly and explained.
In this guide:
- 1. Define an Inventory Write-Off
- 2. Separate Write-Offs From Write-Downs and Shrinkage
- 3. Apply the Accounting Measurement Rules
- 4. Follow a Controlled Write-Off Process
- 5. Set Approval Limits and Evidence Standards
- 6. Post the Journal Entries
- 7. Check the UK Tax and VAT Points
- 8. Choose Systems That Keep the Audit Trail
- Frequently Asked Questions
- How OpsMavix Can Help
1. Define an Inventory Write-Off
What the term means
Stock sits on the balance sheet as a current asset because the business expects to recover its cost through a sale or through use in production. An inventory write-off recognises that this expectation has gone for specific items. Their carrying amount is removed from inventory and charged to the profit and loss account.
The IAS 2 summary published by the IFRS Foundation states that the amount of any write-down of inventories and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. In other words, a loss belongs in the period when it happens, not in whichever period someone gets round to clearing the shelf.
Common triggers
| Trigger | Typical evidence | Usually a full write-off? |
|---|---|---|
| Destroyed or damaged beyond sale | Inspection note, photographs, damage report | Yes, if nothing can be recovered |
| Expired or past a regulatory date | Batch and expiry records | Yes, if it cannot legally be sold or used |
| Missing after a count | Count sheet, recount, investigation notes | Yes, for the missing quantity |
| Obsolete with no realistic buyer | Sales history, supplier return refusal, disposal quote | Often, after recovery options are checked |
| Slow moving but saleable | Ageing report, price evidence | No, consider a write-down instead |
The last row matters. Slow-moving stock is a warning sign, not proof of worthlessness. If it can still be sold at a reduced price, the more accurate treatment is usually a partial write-down.
2. Separate Write-Offs From Write-Downs and Shrinkage
Write-off versus write-down
A write-down reduces the carrying amount of stock to what the business can now expect to recover. A write-off removes the carrying amount entirely. Both apply the same underlying test, and the difference is only how much value remains.
| Question | Write-down | Write-off |
|---|---|---|
| Value remaining | Some, but less than cost | None |
| Stock stays on the books? | Yes, at the reduced amount | No |
| Typical cause | Falling selling price, minor damage, end-of-line stock | Destruction, expiry, loss, total obsolescence |
| Next physical step | Discount, bundle, return or sell through another channel | Dispose of or remove from the system |
| Can it be reversed later? | The standards allow reversal in some circumstances | Rarely relevant once stock has gone |
Writing stock off when it could still be sold for something understates the inventory figure and throws away a recovery option. Leaving it at full cost when it is worthless overstates both stock and profit.
Where shrinkage fits
Shrinkage is the gap between recorded stock and the stock actually found, usually revealed by a count. When that gap is confirmed, the missing units are written off. Our guide to inventory shrinkage covers how to measure the shrinkage rate and reduce it. This guide covers the accounting and approval steps that apply once a loss, of any cause, has been identified.
3. Apply the Accounting Measurement Rules
FRS 102 for most UK private companies
Many UK private companies prepare accounts under FRS 102, issued by the Financial Reporting Council. Paragraph 13.4 requires an entity to measure inventories at the lower of cost and estimated selling price less costs to complete and sell.
Paragraph 13.19 points to the impairment requirements in Section 27. At the end of each reporting period, the entity assesses whether any inventories are impaired, for example because of damage, obsolescence or declining selling prices. Impaired items are measured at selling price less costs to complete and sell, and an impairment loss is recognised. The same paragraph notes that a prior impairment is reversed in some circumstances. Your accountant can confirm how those reversal rules apply to your stock.
IAS 2 for entities using IFRS
Entities reporting under IFRS apply IAS 2. The IFRS Foundation summary says inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
What the rules mean in practice
| Term | Plain-English meaning | What to document |
|---|---|---|
| Cost | What the stock cost to buy or make, under your costing method | Costing method and the cost record used |
| Estimated selling price | What the stock can realistically be sold for now | Recent sales, quotes or price lists |
| Costs to complete and sell | Spending still needed to finish, package, ship or sell it | Rework, carriage, commission or disposal costs |
| Recoverable amount | Selling price minus those costs | The calculation, item by item or by group |
The calculation should be done item by item or for groups of similar items, using evidence that existed at the reporting date. Which framework applies, and the detailed requirements of it, are matters for your finance team or accountant to confirm.
4. Follow a Controlled Write-Off Process
The six steps
A write-off should follow the same route every time, regardless of size. Larger amounts need more evidence and a more senior approver, but the stages stay the same.
- Identify. A count, inspection, expiry check or ageing review flags the stock.
- Quarantine. Move affected stock to a held location so it cannot be picked or sold while the decision is pending.
- Investigate. Confirm quantity, cost and cause. Recount shortages, check open receipts and transfers, and look for supplier, insurance or return recovery.
- Approve. The approver named for that value reviews the evidence and approves, rejects or asks for a write-down instead.
- Post. The stock adjustment and the accounting entry are recorded in the correct period, with a reason code and reference to the approval.
- Dispose. Physical stock is destroyed, recycled, sold for salvage or returned, and the disposal is evidenced.
Keep the steps separate
The person who finds a loss should not usually be the only person who approves and posts it. Separating those roles is a basic control against both honest mistakes and concealment. In a small business that may simply mean the warehouse lead proposes and the owner or bookkeeper approves.
For the adjustment workflow itself, including reason codes and movement checks, see our stock adjustment approval workflow guide.
Process checklist
- Affected stock is quarantined and cannot be allocated to orders.
- Quantity has been recounted by someone other than the original counter.
- Unit cost comes from the stock valuation record, not a list price.
- Recovery options (supplier credit, insurance, salvage, return) have been checked.
- The proposed treatment is a full write-off or a write-down, with the reason stated.
- Approval matches the authority limit for the value.
- The posting period is the period in which the loss occurred or was identified.
- Disposal evidence is attached once the stock has physically gone.
5. Set Approval Limits and Evidence Standards
Approval should rest on evidence the reviewer can check, not on a total alone. Illustrative photograph, not an OpsMavix client.
Image credit: Mikhail Nilov, Pexels License. No edits.
Use tiered authority limits
Authority limits should reflect the business’s size, margins and risk. The thresholds below are a HYPOTHETICAL example to show the structure, not a recommendation.
| Write-off value (hypothetical) | Proposer | Approver | Extra evidence |
|---|---|---|---|
| Up to £250 | Warehouse or stores lead | Operations manager | Reason code and photograph or count sheet |
| £250 to £2,500 | Operations manager | Finance manager | Recount, recovery check and cost calculation |
| Over £2,500 | Finance manager | Finance director or owner | Root-cause note and disposal plan |
Value should be measured per event, with a rule that stops one loss being split into several smaller requests to stay under a limit.
Build a standard evidence pack
| Evidence | Why it matters |
|---|---|
| Item, batch or serial, location and quantity | Ties the write-off to specific stock records |
| Unit cost and calculation | Shows the amount posted is correct |
| Cause and supporting proof | Photographs, inspection reports, expiry records or count sheets |
| Recovery checks | Shows supplier, insurer or salvage options were considered |
| Approver, date and decision | Proves authority was exercised before posting |
| Disposal record | Destruction, recycling or salvage paperwork once the stock has gone |
Review the pattern, not only the item
A monthly report of write-offs by reason, product, location and approver turns individual decisions into management information. Repeated damage in one aisle, frequent expiry on one supplier’s lines or many write-offs just under an approval threshold all deserve attention.
6. Post the Journal Entries
A HYPOTHETICAL month-end example
A hypothetical UK wholesaler completes its month-end review and finds three issues. All figures exclude VAT and are illustrative only.
Damaged stock, full write-off. 40 units of a ceramic line, cost £18 each, were crushed in a racking incident and cannot be sold or repaired.
40 × £18 = £720
Slow-moving stock, write-down. 250 units of a seasonal line cost £24 each. The best realistic selling price is now £15 per unit, and selling them through a clearance channel will cost £2 per unit in carriage and fees.
Recoverable amount per unit: £15 - £2 = £13 Write-down per unit: £24 - £13 = £11 Total write-down: 250 × £11 = £2,750 New carrying amount: 250 × £13 = £3,250
Count shortage, write-off. After a recount and investigation, 15 units of a line costing £30 each remain unaccounted for.
15 × £30 = £450
The entries
| Entry | Debit | Credit | Amount |
|---|---|---|---|
| Damaged stock write-off | Inventory write-offs expense | Inventory | £720 |
| Write-down to recoverable amount | Inventory write-down expense | Inventory (or stock provision) | £2,750 |
| Confirmed count shortage | Inventory losses expense | Inventory | £450 |
Total charge to profit for the month: £720 + £2,750 + £450 = £3,920.
Inventory falls by the same £3,920. Before the review, these three lines were carried at £720 + £6,000 + £450 = £7,170. Afterwards, only the written-down seasonal stock remains, at £3,250. The check: £7,170 - £3,920 = £3,250.
Recovery after the write-off
Suppose a salvage buyer later pays £60 for the broken ceramics. That receipt is recorded as income or as a recovery against the write-off expense, depending on the business’s chart of accounts. The net cost of the damage becomes £720 - £60 = £660. HMRC guidance on lost, stolen, damaged or destroyed goods says VAT applies in the normal way to the price you sell damaged goods for.
Choices to agree with finance
- Expense line. Some businesses charge write-offs within cost of sales; others use a separate expense line so the amount stays visible. Agree one approach and apply it consistently.
- Direct credit or provision. A write-down can credit inventory directly or credit a stock provision account that sits against inventory. A provision keeps original cost visible in the stock ledger.
- Stock system and ledger together. The quantity adjustment in the stock system and the ledger entry must agree. If the stock system still shows 40 sellable units after the ledger write-off, the business can sell stock it does not have.
7. Check the UK Tax and VAT Points
This section is general information, not tax advice. Your accountant or finance team should confirm the treatment for your business.
Corporation tax and income tax
HMRC’s Business Income Manual covers stock valuation for tax purposes. BIM33145 notes that slow-moving stock may point to net realisable value being below cost, but that slow movement does not of itself mean it is. It also says formula-based valuations should reflect realistic assumptions and be checked each year.
BIM33150 discusses stock provisions in the context of FRS 102 and says the calculation requires expertise and judgement. Whether a particular write-off or provision is deductible, and in which period, depends on the facts and the accounts. Do not assume the accounting entry settles the tax position; ask your accountant to confirm it.
VAT
HMRC’s guidance on lost, stolen, damaged or destroyed goods includes these points:
- Goods stolen from your premises before you have invoiced a customer do not carry VAT.
- Where goods are lost and no VAT invoice was issued, you should make a note in your VAT records explaining the loss.
- No VAT is due on insurance payments covering damage, and HMRC may ask to see evidence of the claim.
- If you suspect fraud, report it to the police and contact HMRC with details.
Treatment for goods lost after a sale depends on the contract and who was responsible for the goods. Retail scheme users may need to adjust scheme calculations. Input tax recovery on written-off stock is not covered on that page, so finance or your accountant should confirm it.
Records worth keeping
| Record | Accounting use | Tax and VAT use |
|---|---|---|
| Approved write-off request | Supports the journal entry | Explains the loss if HMRC asks |
| Count and investigation notes | Supports the quantity | Supports theft or loss explanations |
| Valuation workings | Supports cost and recoverable amount | Supports stock valuation |
| Disposal or salvage records | Confirms the stock has gone | Shows any salvage sale was recorded |
| Insurance correspondence | Supports any recovery | Evidence HMRC may ask to see |
8. Choose Systems That Keep the Audit Trail
What the system must do
Whatever tools you use, the write-off process needs a few capabilities: reason-coded adjustments, an approval step before posting, a link between the stock movement and the ledger entry, attachments for evidence and a report of write-offs by reason and approver.
Some accounting packages and inventory applications provide parts of this through their standard stock adjustment features. Check the specific edition and configuration you have before assuming a control is missing or present.
Compare the approaches fairly
| Approach | When it fits | Limitations to check |
|---|---|---|
| Configure current tools | Adjustments already have reason codes and user permissions | Whether approval happens before posting, not after |
| Integrate existing systems | Stock and accounts are separate but each works well | Failed postings, mismatched periods and reconciliation |
| Packaged inventory software | Standard stock adjustment and approval features fit the process | Approval tiers, evidence storage and reporting depth |
| Focused custom application | A specific write-off and approval workflow is the gap | Build, support and integration with accounts |
| Full ERP, packaged or custom | Wider stock, purchasing and finance coordination is needed | Scope, migration, cost and implementation effort |
Prevention still matters
A good write-off process records losses accurately; it does not stop them. Ageing reports and early markdowns, covered in our guide to dead stock management, can turn a future write-off into a smaller write-down. Regular cycle counting finds shortages while they are still traceable, and ABC analysis focuses review effort on the lines that carry the most value. For receiving and picking controls, see how to prevent stock discrepancies.
Pilot checklist
- Raise a write-off request with a reason code and attached evidence.
- Confirm the request routes to the right approver for its value.
- Reject a request and confirm the stock record is unchanged.
- Approve a request and confirm the stock quantity and ledger entry agree.
- Post a write-down and confirm the new carrying amount is visible.
- Attempt to split a large loss and confirm the control catches it.
- Produce a monthly report by reason, product, location and approver.
- Ask finance to trace one write-off from count sheet to journal and back.
Frequently Asked Questions
What is an inventory write-off?
It is the removal of the cost of stock from the balance sheet when that stock has no remaining value, because it is lost, destroyed, expired or obsolete with no buyer. The amount is recognised as an expense in the period of the loss.
What is the difference between a write-off and a write-down?
A write-down reduces stock to the amount the business can still recover. A write-off removes its value entirely. Both come from the rule that inventory is carried at the lower of cost and its recoverable amount under the applicable standard.
Which accounting standard applies in the UK?
Many UK private companies use FRS 102, which measures inventories at the lower of cost and estimated selling price less costs to complete and sell. Entities reporting under IFRS use IAS 2 and net realisable value. Your accountant can confirm which framework applies to you.
Who should approve an inventory write-off?
Someone other than the person who identified the loss, with authority matched to the value. Many businesses use tiered limits so small losses are approved by operations and larger ones by finance or the owner.
Does a write-off reduce my tax bill?
It may affect taxable profit, but deductibility and timing depend on the facts and how the stock is valued. Treat this as a question for your accountant, not an automatic assumption.
Do I pay VAT on stolen stock?
HMRC guidance says no VAT is due on goods stolen from your premises before you have invoiced a customer for them. Other situations, such as goods lost after a sale, depend on the contract and invoicing, so check HMRC guidance and your accountant.
Can a write-down be reversed?
FRS 102 notes that a prior impairment of inventory is reversed in some circumstances. Finance should confirm whether the conditions are met and how to record it.
How often should we review stock for write-offs?
At least at each reporting date: FRS 102 requires an impairment assessment at the end of each reporting period. Many businesses also review ageing and damaged stock monthly so losses are recognised in the right period.
Can OpsMavix build a write-off approval system?
Yes. OpsMavix can build focused applications or a full custom ERP, and can configure or integrate suitable existing tools where those approaches fit the requirements.
How OpsMavix Can Help
OpsMavix can map how stock losses are found, approved, posted and disposed of today, then define the controls needed to make each write-off traceable from the shelf to the ledger.
That may involve configuring the tools you already have, connecting your stock system to your accounts, building an inventory automation system with reason-coded adjustments, adding invoice approval workflow automation patterns to stock approvals or developing a full custom ERP.
Contact OpsMavix with one recent inventory write-off, the records behind it and the handoff that creates the most rework. We can use that evidence to define requirements and a practical pilot.
Keep reading
Getting value from OpsMavix? Add us as a preferred source on Google — you'll see more of our operations content in your AI Overviews, AI Mode and Search.