An inventory revaluation journal entry writes down the carrying value of inventory to what you can actually recover from selling it. The entry has two acceptable forms. Under the Direct Method, you debit Cost of Goods Sold and credit Inventory for the write-down amount. Under the Allowance Method, you debit a Loss on Inventory Write-Down account and credit a contra-asset called Allowance to Reduce Inventory to NRV. Both reduce net inventory on the balance sheet and reduce income for the period; they differ in whether the original cost stays visible on your books.
When a Write-Down Is Required
Inventory cannot sit on the balance sheet above the amount you expect to recover from selling it. Under IFRS, all inventory is measured at the lower of cost and net realizable value.1IFRS. IAS 2 Inventories Under US GAAP, companies using FIFO or weighted-average cost apply the same lower-of-cost-and-NRV test; companies using LIFO or the retail inventory method instead apply a lower-of-cost-or-market test with a defined ceiling and floor.2KPMG. Inventory Accounting: IFRS Standards vs US GAAP
Net realizable value is the price you expect to sell the goods for, minus whatever it costs to finish them and get them out the door.1IFRS. IAS 2 Inventories Once NRV drops below recorded cost, you need to book a write-down. Common triggers include physical damage, technological obsolescence, expiration of perishable goods, shifts in demand, a decline in market prices, and overproduction that leaves surplus stock movable only at steep discounts.
Calculating the Write-Down Amount
The write-down equals the gap between recorded cost and the new carrying value. Under the NRV standard, the new carrying value equals estimated selling price minus estimated costs to complete and sell (rework, commissions, shipping, and similar expenses).
Say you carry a product at $50 per unit. You expect to sell it for $65, and disposal and completion costs total $20. NRV is $45, so each unit takes a $5 write-down. Multiply by units on hand to get the total adjustment.
You can run this calculation item by item, by category, or across total inventory. Item-by-item is the most conservative because gains in one category cannot mask losses in another. Pick a level and apply it consistently from period to period. Switching methods without justification draws auditor scrutiny, and on the tax side it generally requires filing Form 3115 with the IRS to obtain consent for the change.3Internal Revenue Service. Instructions for Form 3115
Direct Method Entry
The Direct Method reduces the Inventory asset account itself. For a $25,000 write-down:
- Debit: Cost of Goods Sold $25,000
- Credit: Inventory $25,000
The loss flows straight into COGS on the income statement, and the inventory line on the balance sheet drops by $25,000. The method is simple and works when the write-down is immaterial. The tradeoff is that it erases the original cost from the books. Nobody reading your financials afterward can see what you originally paid versus how much value you lost, and the revaluation gets buried in the same line as your normal cost of sales, which can distort period-over-period comparisons.
Allowance Method Entry
The Allowance Method preserves the original cost. Instead of crediting Inventory, you credit a contra-asset account. The debit side goes to a separate expense line, usually labeled Loss on Inventory Write-Down, though some companies run it through COGS.
For the same $25,000 write-down:
- Debit: Loss on Inventory Write-Down $25,000
- Credit: Allowance to Reduce Inventory to NRV $25,000
On the balance sheet, inventory still appears at its gross historical cost, with the allowance shown as a direct reduction beneath it. Readers can see both the original investment and the cumulative revaluation. Most controllers and auditors prefer this approach because it carries more information and keeps the write-down traceable.
Reversing a Prior Write-Down
The reversal rules diverge sharply between the two frameworks, and the entry you make (if any) depends on which one you report under.
Under US GAAP
Once inventory is written down at a fiscal year-end, the reduced amount becomes the new cost basis. The write-down is permanent. If the market later recovers, you cannot write the inventory back up.2KPMG. Inventory Accounting: IFRS Standards vs US GAAP The recovery shows up only as a higher margin on the eventual sale. The narrow exception involves write-downs caused by changes in exchange rates, which can be adjusted if the rate moves back.
Interim periods are different. If you booked a write-down in Q1 and conditions improve in a later quarter of the same fiscal year, you can reverse that interim write-down. After the fiscal year closes, it sticks.
Under IFRS
IAS 2 requires a reversal when the circumstances that caused the original write-down no longer exist. The reversal is recognized as a reduction in the amount of inventory expense in the period the recovery occurs, and the reversed amount can never push the carrying value above the original cost.4IFRS. IAS 2 Inventories So if you wrote inventory down from $50 to $40 and NRV later climbs to $55, you reverse only $10, bringing the carrying value back to $50.
Under the Allowance Method, a $5,000 recovery is recorded as:
- Debit: Allowance to Reduce Inventory to NRV $5,000
- Credit: Recovery of Inventory Loss (or COGS) $5,000
Tax Treatment Is Separate
The book entry and the tax deduction follow different rules, so do not assume one covers the other. For federal tax purposes, inventory must be valued using a method that conforms to best accounting practices in the trade and clearly reflects income, with cost or lower of cost or market as the two accepted bases.5eCFR. 26 CFR 1.471-2 – Valuation of Inventories
Goods unsalable at normal prices because of damage, imperfections, style changes, odd lots, or similar causes must be valued at their bona fide selling price minus the direct cost of disposing of them. Raw materials or partly finished goods in poor condition get valued on a reasonable basis given their usability, but never below scrap value.6eCFR. 26 CFR Part 1 – Inventories A bona fide selling price means an actual offering during a window ending no later than 30 days after the inventory date, and the burden of proof is on you.
The IRS does not accept a general reserve for anticipated price declines. The write-down must reflect the actual condition of specific goods, not an estimated future deterioration in value.5eCFR. 26 CFR 1.471-2 – Valuation of Inventories3Internal Revenue Service. Instructions for Form 31157Internal Revenue Service. 2025 Instructions for Form 1120
What to Keep in the Supporting File
A write-down is a manual entry built on management judgment, which makes it a natural target for auditor review. The supporting file should include the specific items or categories written down, the original cost and newly determined NRV for each, the source of the NRV estimate (market data, recent sales, price quotes, or appraisals), and the calculation showing the write-down amount. Keep a record of the trigger as well, whether that was physical damage noted during a cycle count, a competitor product launch, or a measurable decline in recent selling prices.
Have the entry approved by someone who does not have direct control over the physical inventory or the general ledger posting. Separation of duties matters because a write-down reduces an asset’s recorded value, and without an independent check it creates an opening to conceal theft or manipulation. Larger organizations route revaluation entries through the controller or CFO before posting, with sign-off documented in the journal entry record.