Inventory and sales Updated November 2026

Inventory write-down

When inventory's net realizable value (selling price less costs to sell) drops below its cost, write it down to NRV: debit Cost of Goods Sold or Loss on Inventory Write-Down and credit Inventory for the difference. The same entry, credited to Inventory, records shrinkage found in a physical count.

Syntax

Write-down = Cost - Net realizable value; Dr Cost of Goods Sold (or Loss on Inventory Write-Down) / Cr Inventory

Part	What it is
`Net realizable value (NRV)`	Estimated selling price minus costs to complete and sell.
`Cost of Goods Sold`	Usual debit for a small, routine write-down.
`Loss on Inventory Write-Down`	Separate expense used when the amount is material and should be shown apart from COGS.
`Allowance to Reduce Inventory to NRV`	Optional contra-asset credited instead of Inventory when the company wants to keep cost in the inventory account.

Examples

Dr Cost of Goods Sold 1,500 / Cr Inventory 1,500

Result: Inventory carried at 8,500, expense up 1,500

Items cost 10,000 but can now sell for only 8,500 net.

Dr Loss on Inventory Write-Down 20,000 / Cr Inventory 20,000

Result: Material loss shown on its own line

A discontinued product line is written down from 32,000 to 12,000.

Dr Cost of Goods Sold 350 / Cr Inventory 350

Result: Records agree with the count

Perpetual records show 12,350, physical count 12,000: shrinkage of 350.

Common mistakes

Writing inventory up when prices recover: under US GAAP a write-down is not reversed; the lower amount becomes the new cost basis (IFRS allows reversal up to the original cost).
Comparing cost with the gross selling price: NRV is the selling price after deducting the costs to finish and sell the goods.
Using the write-down to hide theft: shrinkage should be investigated and, if material, reported separately from normal cost of goods sold.

Practice Inventory write-down

These drills check your answer on live data, free, no account needed.

Inventory write-downAt year end, Northgate Garden Center's inventory has a cost of $18,500. Because of damage and falling prices, its net realizable value is only $16,900. The company measures inventory at the lower of cost and net realizable value and charges write-downs to Cost of Goods Sold.
Inventory shrinkageTidewater Market uses a perpetual inventory system. At year end its records show an Inventory balance of $42,300, but a physical count finds only $41,650 of merchandise on hand. The company charges shrinkage to Cost of Goods Sold.

Questions

What is the journal entry to write down inventory?

Debit Cost of Goods Sold (or Loss on Inventory Write-Down) and credit Inventory for cost minus net realizable value.

What is the lower of cost or net realizable value rule?

Inventory is reported at the lower of its cost or the amount it can be sold for less selling costs, so losses are recognized as soon as value falls, not when the goods are sold.

Cost of goods soldHow to record cost of goods sold: Dr Cost of Goods Sold, Cr Inventory at each sale under a perpetual system, or compute it at year end under periodic.
Inventory purchase (perpetual)How to record merchandise bought for resale under a perpetual system: Dr Inventory, Cr Accounts Payable, plus freight-in, purchase returns and periodic.
Depreciation entryHow to record depreciation: Dr Depreciation Expense, Cr Accumulated Depreciation. Straight-line formula, monthly and annual examples and book value.
Bad debt expenseHow to estimate and record bad debt expense: Dr Bad Debt Expense, Cr Allowance for Doubtful Accounts. Percent of credit sales versus aging of receivables.