Writing down dead inventory at year-end means reducing its book value to what you can realistically recover from it, and keeping the evidence that supports the number. Under US GAAP, inventory on FIFO or average cost is carried at the lower of cost and net realizable value: the expected selling price, less the costs to sell or dispose of it. The process has five steps: identify the candidates, estimate recovery per SKU, compare to cost, document the estimate, and post the entry before you close December. The evidence is what turns a guess into an adjustment your CPA can accept.
FASB's Accounting Standards Update 2015-11 set the measurement for inventory on any method other than LIFO or the retail inventory method: lower of cost and net realizable value (NRV). The ASU defines NRV as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. When the evidence says NRV has dropped below cost, the difference is recognized as a loss in the period it occurs, not when the units finally leave.
For an ecommerce seller, "costs of disposal" includes the marketplace's referral fee, the fulfillment fee, the storage you will pay until the units sell, and any removal or liquidation fees. A unit that sells for more than it cost can still need a write-down once those are counted.
The tax rules for valuing inventory below cost are separate. IRS Publication 538 and Treasury Regulation 1.471-2(c) cover goods that cannot be sold at normal prices because of damage, style changes, or similar causes, and value them at a bona fide selling price, which the regulation ties to goods offered for sale within 30 days after the inventory date. Whether and how that applies to your return is for your CPA. This article covers the books.
Pull an aging report by warehouse and sort by value, not by units. Then add three filters:
The inventory aging report is usually where these first show up. If you are running a year-end count, the damaged and unsellable units you find there belong on this list too; the year-end count guide explains how to separate them by disposition as you count.
For each candidate, decide how the units will leave, then price that route:
Pick one route per SKU. An estimate that assumes full-price sales for units you plan to liquidate is the most common way a write-down ends up too small.
Compare NRV per unit to the FIFO cost per unit on the books, including landed cost. Where NRV is lower, the gap times the units on hand is the write-down. Where NRV is higher, leave the SKU alone, even if it is slow.
For each SKU written down, keep a short file:
This is what a reviewer asks for. A spreadsheet tab per SKU with screenshots of the source reports is enough for most sellers.
Debit an inventory write-down account, usually within COGS so gross margin reflects it, and credit inventory or an inventory valuation reserve. Ask your CPA which they prefer. Under US GAAP, the reduced amount becomes the new cost basis for those units, so a later recovery in price does not get written back up.
Illustrative numbers. Take a seller reviewing three SKUs at December 31.
SKU A, slow mover, selling at a markdown. 600 units at a FIFO cost of $12.00, carrying value $7,200. Recent price achieved: $19.99. Referral fee at 15 percent: $3.00. Illustrative fulfillment fee: $5.10. Expected storage until sold: $0.60 per unit.
NRV per unit: $19.99 minus $3.00 minus $5.10 minus $0.60, or $11.29. That is $0.71 below cost. Write-down: 600 times $0.71, or $426.
SKU B, discontinued, going to liquidation. 400 units at $9.00, carrying value $3,600. Average selling price was $24.00. Gross recovery at an assumed 8 percent, inside Amazon's stated range: $1.92 per unit. Referral fee at 15 percent of that: $0.29. Illustrative processing fee: $0.30.
NRV per unit: $1.92 minus $0.29 minus $0.30, or $1.33. Total NRV: 400 times $1.33, or $532. Write-down: $3,600 minus $532, or $3,068.
SKU C, customer-damaged returns. 250 units at $7.00, carrying value $1,750. Not resellable; will be disposed of. NRV is zero. Write-down: $1,750. The disposal fee is an expense when Amazon charges it, not part of the write-down.
Total write-down: $426 plus $3,068 plus $1,750, or $5,244. Carrying value moves from $12,550 to $7,306, which checks: SKU A at 600 times $11.29 is $6,774, plus SKU B at $532, plus SKU C at zero.
Notice that SKU A has a positive selling margin on the P&L view and still needs a write-down once fees and storage are counted. The obsolete inventory glossary entry covers the general concept; this is where it bites in practice.
The inputs for steps 1 to 3 already exist in reconciled books. ConnectBooks inventory reports by warehouse, value, and aging, with FIFO cost and landed cost per unit, and the settlement lines carry the actual fees each SKU paid.
Crunch, the AI CFO inside ConnectBooks, can take the next question: whether to hold, discount, liquidate, or remove each aged SKU. It treats already-paid COGS as sunk and weighs future storage and aged inventory fees, selling fees, sell-through, velocity, and expected cash recovery, then ranks the SKUs. That ranking tells you the likely recovery route for step 2. It does not set your NRV for the books, it cannot know what a liquidator will pay this month or whether a damaged unit can be refurbished, and it does not post the write-down entry. The estimate, the evidence file, and the approval remain yours and your CPA's.
Run the list in November, not on January 10. A November review leaves time to try the markdown, request a liquidation estimate, or ship damaged units back for inspection, so the December 31 number rests on evidence gathered in December instead of assumptions made after the fact.
Running an e-commerce business comes with plenty of challenges, but ConnectBooks is here to make your life easier. With real-time insights, seamless integrations, and detailed tracking of your profitability and inventory, you can stay ahead of the game. Whether you’re selling on Amazon, Shopify, Walmart, TikTok or eBay, ConnectBooks helps you manage your finances with 100% accuracy and confidence, so you can focus on growing your business.
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