Plain definition
An inventory write-down reduces inventory to its net realisable value when expected selling proceeds, after costs to complete and sell, are lower than recorded cost under the applicable requirements. It recognises that stock can remain physically present yet no longer recover its book cost because of obsolescence, damage, expiry, falling prices, or weak demand. It differs from a normal inventory count variance, though both can require investigation.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A retailer holds 500 units recorded at each, or . A new model makes them slow-moving, and the business expects to sell them for each after selling costs per unit. Net realisable value is , so it records a write-down. The inventory remains on hand, but its reported amount now reflects expected recovery.
| Expected selling price per unit | |
|---|---|
| Selling cost per unit | |
| Units | |
| Net realisable value |
Expected prices and selling costs need current evidence. A temporary discount or a management wish to clear stock does not automatically prove that every item should be written down.
Why it matters
Without a write-down, gross margin and working capital can look healthier while cash is trapped in stock that will not recover its cost. An excessive write-down can also create artificial future margin when the goods later sell.
Practical consequence
Run aging and slow-moving reports by SKU, compare cost with recent sales, offers, damage reports, and completion costs, and have merchandising owners confirm the action plan. Document the calculation and review later sales against it. Separate write-down decisions from purchasing accountability so inventory risk is visible rather than buried in a broad reserve.