An inventory revaluation journal entry writes down the book value of inventory to reflect what the goods are actually worth when that figure has fallen below recorded cost. You can record it two ways. The Direct Method debits Cost of Goods Sold and credits Inventory. The Allowance Method debits a separate Loss on Inventory Write-Down account and credits a contra-asset called Allowance to Reduce Inventory to NRV. Both reduce net inventory on the balance sheet by the same amount; the Allowance Method preserves the original cost as a separate figure so readers can still see it.
When the Entry Is Required
Inventory cannot sit on the balance sheet at more than 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 apply the same NRV test; those using LIFO or the retail method apply the older lower of cost or market rule.2KPMG. Inventory Accounting: IFRS Standards vs US GAAP
Net realizable value is the expected selling price minus the costs to finish the goods and get them out the door.1IFRS. IAS 2 Inventories Once NRV drops below recorded cost, a write-down is required. Typical triggers are physical damage, obsolescence, expiration of perishable goods, demand shifts, sharp declines in market price, and overproduction that can only be cleared at discounts.
Calculating the Write-Down
The write-down equals recorded cost minus the new carrying value. Under the NRV standard, the new carrying value is the estimated selling price less the estimated costs to complete and sell.
Take a product carried at $50 per unit. You expect to sell it for $65, and disposal and completion costs run $20. NRV is $45, so the write-down is $5 per unit. Multiply by units on hand to get the total entry amount.
You can do the calculation item by item, by category, or across total inventory. Item-by-item is the most conservative because gains in one line cannot offset losses in another. Whichever level you choose, apply it consistently period to period.
Direct Method Journal Entry
The Direct Method reduces the Inventory 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 balance drops on the balance sheet. This works well when the amount is immaterial. The tradeoff: the original cost is erased from the books, so a later reader cannot see what you originally paid versus how much value you gave up. It also blends the revaluation loss into the same line as ordinary cost of sales, which can distort period-over-period comparisons.
Allowance Method Journal Entry
The Allowance Method leaves the Inventory account untouched at its original cost and puts the reduction into a contra-asset. For the same $25,000 write-down:
- Debit Loss on Inventory Write-Down $25,000
- Credit Allowance to Reduce Inventory to NRV $25,000
Some companies run the debit through COGS instead of a separate loss line. Either way, the balance sheet still shows inventory at its gross historical cost, with the allowance shown as a direct reduction beneath it. Readers see both the original investment and the cumulative revaluation adjustment. This is where most controllers and auditors prefer to land because everyone has more information to work with.
Reversing a Prior Write-Down
Whether you can reverse a write-down depends on your framework, and this is where the two systems diverge sharply.
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 recovers later, you cannot write the inventory back up; the recovery only shows up as a higher margin on the eventual sale.2KPMG. Inventory Accounting: IFRS Standards vs US GAAP A narrow exception exists for write-downs driven by exchange rate changes.
Under IFRS, a reversal is required when the conditions that caused the original write-down no longer exist. The reversal is recognized as a reduction in inventory expense in the period the recovery occurs, and it can never push the carrying value back above the original cost.3IFRS. IAS 2 Inventories If you wrote inventory down from $50 to $40 and NRV later climbs to $55, you reverse only $10, bringing it back to the original $50.
Using the Allowance Method, a $5,000 recovery entry looks like this:
- Debit Allowance to Reduce Inventory to NRV $5,000
- Credit Recovery of Inventory Loss (or COGS) $5,000
Interim-Period Timing
The write-down entry is not just a year-end exercise. Under US GAAP, a write-down must be recognized in the interim period when the decline occurs unless you have good reason to believe NRV will recover before the goods are sold or before the fiscal year ends. If you booked a write-down in one interim period and conditions improve in a later quarter of the same fiscal year, you can reverse it. Once the fiscal year closes, the write-down sticks.
This catches companies off guard. Inventory that takes a hit in Q1 needs the entry in Q1, not deferred to Q4 on the assumption things will turn around. Pushing a real loss into a later quarter to smooth earnings is exactly what auditors look for.
Documentation and Approval
Because a revaluation entry is a manual journal involving judgment, it draws auditor attention, and thin documentation is where things fall apart.
The support file behind the entry should identify the specific items or categories being written down, list the original cost and the newly determined NRV for each, cite the source of the NRV estimate (market data, recent sales, price quotes, appraisals), and show the arithmetic that produced the total. Record why the write-down was triggered in the first place: damage documented during a cycle count, a competitor product launch, a measurable decline in recent selling prices, or something similar.
Approval should come from someone who does not control the physical inventory or post to the general ledger. Separation of duties matters here because a write-down reduces recorded asset value, and without an independent check, that opens a path to conceal theft or manipulation. Larger organizations route the entry through the controller or CFO for sign-off documented in the journal record.
The Book Entry Is Not a Tax Deduction
Recording the write-down on your books does not automatically produce a tax deduction of the same amount. For federal tax purposes, inventory must be valued using a method that conforms to best accounting practices in the trade and clearly reflects income, and the accepted bases are cost or the lower of cost or market.4eCFR. 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 direct disposal costs. 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.5eCFR. 26 CFR Part 1 – Inventories Raw materials or partly finished goods in poor condition are valued on a reasonable basis given their usability, but never below scrap value.
What the IRS does not accept: a general reserve for anticipated price declines. You cannot deduct an allowance built on estimated future deterioration; the write-down must reflect the actual condition of specific goods.4eCFR. 26 CFR 1.471-2 – Valuation of Inventories If a change in your inventory valuation method is involved, you generally need IRS consent through Form 3115, and the transition may trigger a Section 481(a) adjustment that adds to or subtracts from taxable income.6Internal Revenue Service. Instructions for Form 3115