How do I account for damaged, expired, or obsolete inventory in my books?
When inventory gets damaged, expires, or becomes obsolete, you need to remove its value from your books. Leaving it on your balance sheet overstates what your business actually owns and distorts your profit picture. The process is straightforward, but documentation matters.
There are two situations. A write-down reduces the recorded value of inventory that still has some worth but less than what you originally paid. A write-off removes the value entirely when the inventory is worthless. In both cases, you’re recognizing a loss that reduces your taxable income.
The journal entry for a full write-off is a debit to an expense account like Inventory Loss or Inventory Shrinkage and a credit to your Inventory asset account. This moves the cost from your balance sheet to your income statement as an expense. For a partial write-down, the entry works the same way but only for the difference between original cost and the reduced value.
In QuickBooks Online, you can handle this through the Inventory Quantity Adjustment feature. For items you’re throwing away completely, adjust the quantity to zero. For items that still have some value, adjust both quantity and total value. Make sure the adjustment account is mapped to an appropriate expense category and not just dumped into Cost of Goods Sold unless your accountant specifically wants it there.
Document everything. Record what was damaged or expired, the quantity, the original cost, and why it’s being removed. Take photos if the inventory was physically damaged. Keep any incident reports, insurance claims, or disposal records. This documentation protects you if the IRS ever questions the deduction and helps you spot patterns over time. If you’re consistently writing off the same products, that’s a purchasing or storage problem worth fixing.
Do physical inventory counts regularly. Monthly or quarterly counts catch problems early. If you only count once a year, you might discover thousands of dollars in expired product that’s been sitting on your balance sheet for months, giving you a false sense of what your business is worth. Regular counts also help you identify slow-moving items before they become obsolete.
If you run a restaurant, retail shop, or any business with perishable or seasonal products, inventory losses are a normal part of operations. The goal isn’t to eliminate them but to track them accurately so you understand the true cost of running your business. Proper inventory accounting goes beyond counting what’s on the shelf. It includes valuation methods, shrinkage tracking, and making sure your balance sheet reflects what your inventory is actually worth.
Getting this right consistently takes discipline. A small business bookkeeper can set up the right accounts and build a process so these adjustments happen when they should, not as a scramble at year end when you’re trying to figure out where the money went.
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