Inventory that stops selling does not stop costing money. It keeps sitting on the balance sheet at the price it was bought for, keeps occupying paid storage space, and keeps making the seller’s asset position look better than it actually is, right up until someone writes it down to what it is actually worth. A lot of sellers never do that step, which means the balance sheet quietly overstates assets for months or years after a product has effectively become worthless.
Cost Is Not the Same Question as Value
Inventory is recorded at cost when purchased, using whichever costing method the seller applies. That cost figure has nothing to do with what the inventory can actually be sold for today. A seller who bought 500 units of a discontinued phone case at CAD $4 each recorded CAD $2,000 in inventory at the time of purchase, and that figure stays on the books at CAD $2,000 indefinitely unless someone actively adjusts it, regardless of whether the case still sells for anything close to its original price or whether it sells at all.
The accounting principle that requires the adjustment is lower of cost or market, sometimes described as lower of cost or net realizable value: inventory is carried on the books at whichever is lower, its original cost or what it can realistically be sold for now. When market value drops below cost, the difference is a loss that needs to be recognized in the period it becomes apparent, not deferred until the inventory is finally disposed of.
What Counts as a Trigger for a Write-Down
A few conditions typically signal that inventory needs review, not automatic write-down, but review:
- a SKU has had no sales activity for an extended period, commonly six to twelve months depending on the product category and normal sales velocity for that category
- a product has been discontinued by the seller or superseded by a newer version, making the remaining stock harder to sell at full price
- physical damage, expiration, or deterioration has occurred while the inventory sat in storage
- a marketplace or platform has delisted the product or changed a policy that makes the existing stock non-compliant
- competitive pricing pressure has pushed the realistic resale price below the original cost, independent of the seller’s own condition or age
None of these automatically produces a specific dollar write-down. Each requires an actual estimate of current realizable value, which is where sellers most often skip the step: flagging a SKU as slow-moving in a spreadsheet is not the same as adjusting its carrying value on the books.
Estimating Net Realizable Value
For inventory still expected to sell, even at a reduced price, net realizable value is the price it can reasonably be sold for, less any remaining costs to sell it, such as marketplace fees, shipping, or refurbishment. A product bought at CAD $10 that can now only realistically move at CAD $6 through a clearance channel, after accounting for the fees on that clearance sale, should be written down to that net figure, not left at the original CAD $10.
For inventory with no realistic path to sale, whether because it is damaged, expired, or has zero remaining demand, net realizable value is effectively zero or close to it, and the inventory should be written off rather than written down to a partial value. The distinction matters because a write-down still shows some remaining asset value, while a write-off removes the item from inventory value entirely and recognizes the full remaining cost as a loss.
Booking the Write-Down
The mechanics are the same regardless of platform: reduce the inventory asset account by the amount of the write-down, and recognize a corresponding expense, typically to a cost of goods sold or inventory write-down expense account, in the period the write-down is identified. The inventory unit count does not change unless the units are physically disposed of; the write-down adjusts the dollar value carried against those units, not the quantity on hand.
Where units are later actually liquidated, donated, or discarded, that is a separate event from the write-down itself. A seller who wrote a SKU down to a reduced net realizable value, then later sells the remaining stock through a liquidator at roughly that value, records the liquidation sale normally against the already-reduced carrying value. A seller who instead discards or donates the stock removes the remaining carrying value entirely at that point.
GST/HST Treatment on Write-Offs
Writing inventory down or off does not itself trigger a GST/HST adjustment; GST/HST was applied, or an input tax credit was claimed, at the time the inventory was originally purchased, and an internal accounting write-down does not reverse that. Where inventory is later actually disposed of through a taxable sale, such as a liquidation sale, GST/HST applies to that sale in the normal way based on the price actually charged. Where inventory is discarded or donated with no sale, there is generally no GST/HST consequence on the disposal itself, though a registrant should confirm treatment with CRA’s guidance on inventory and GST/HST where the situation involves a large write-off or a donation to a registered charity.
Why Sellers Skip This Step
Write-downs are easy to defer because nothing forces the issue day to day. Cash flow is unaffected, since no money changes hands at the moment of the write-down. Sales reporting is unaffected, since a write-down is a balance sheet adjustment, not a sales transaction. The only thing that changes is asset value and reported profit for the period, which is exactly why lenders, investors, and buyers reviewing the books, covered in more detail in Preparing E-Commerce Books for Financing, Acquisition, or Investor Review, specifically look for aged inventory that has never been written down. Inventory sitting at full original cost two years after its last sale is a signal the books have not been maintained to reflect actual asset value, not a signal the product is still worth what was paid for it.
What This Requires from Your Bookkeeping
- a periodic aged-inventory review, commonly quarterly, flagging SKUs with no sales activity over a defined threshold
- an estimated net realizable value for each flagged SKU, not just a flag that it is slow-moving
- a recorded write-down or write-off in the period the reduced value is identified, not deferred until physical disposal
- separate tracking of liquidation or disposal events against the already-adjusted carrying value, so the same loss is not recognized twice
- GST/HST treatment confirmed at the point of actual disposal or liquidation sale, separate from the write-down entry itself
Scope of This Guide
This guide covers identifying and recording inventory write-downs and write-offs. It does not cover:
- inventory costing method selection that determines original carrying cost, covered in Inventory Costing Methods: FIFO vs Weighted Average
- reconciling inventory counts to platform records, covered in Inventory Reconciliation for Marketplace Sellers
- cash flow planning around inventory purchasing decisions, covered in Inventory as a Cash Flow Problem
Related Guides
- Inventory Costing Methods: FIFO vs Weighted Average covers how original inventory cost is determined before any write-down is applied.
- Inventory Reconciliation for Marketplace Sellers covers confirming actual unit counts, a separate exercise from valuing those units correctly.
- Preparing E-Commerce Books for Financing, Acquisition, or Investor Review covers why outside reviewers specifically check for unaddressed aged inventory.
Get in touch to discuss your situation.