How to Write Down Inventory to Net Realizable Value
Reducing the carrying value of inventory when the expected selling price falls below cost.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Inventory Write-Down Expense | Expense (+) | 3,000.00 | - |
| Merchandise Inventory | Asset (-) | - | 3,000.00 |
💡 Accountant's Note
Under IAS 2, inventory must be reported at the lower of cost or NRV. For fast-moving e-commerce categories like electronics or fashion, price drops can quickly push NRV below cost.
Practitioner & Systems Framework
💻 ERP Architecture
Run a monthly NRV review report comparing current selling price (or planned promotional price) to unit cost for each active SKU. For SKUs where NRV < cost, calculate the write-down as (cost − NRV) × units on hand. Apply the write-down directly to inventory. If using an allowance account (see slow-moving inventory reserve), reconcile the two approaches to avoid double-counting.
⚠️ Audit Flags
NRV assessments are highly judgmental: (1) What selling price is used — current price, expected post-promotion price, or liquidation price? (2) Are selling costs (shipping, platform fees) deducted from the selling price to arrive at true NRV? (3) Have subsequent events (post-balance sheet price changes) been considered? Large write-downs recorded at year-end after a profitable quarter may attract scrutiny.
📄 Required Documentation
NRV assessment schedule (SKU, cost per unit, estimated selling price, selling costs, NRV, write-down per unit and total), pricing evidence (current platform listing prices, competitor prices for reference), management approval for write-down, and previous period NRV comparison showing consistency of approach.
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.