How to Write Off Inventory in QuickBooks (Damaged, Obsolete, or Stolen)

To write off inventory in QuickBooks, reduce the inventory asset and record the same amount as an expense, usually to a Cost of Goods Sold account named something like Inventory Shrinkage or Inventory Write-Off. In QuickBooks Online you use an Inventory Quantity Adjustment and point it at that expense account; in Desktop you use Vendors, then Inventory Activities, then Adjust Quantity/Value on Hand. Either way the asset comes off the balance sheet and the loss lands on the profit and loss in the period you discovered it.

Every business that holds stock eventually writes some of it off. Product breaks in the warehouse, food expires, a model becomes unsellable, or a count comes up short. Leaving it on the books inflates your assets and overstates your profit, and it makes the balance sheet a document nobody should trust. This guide covers how to do the write-off correctly and, just as importantly, how to make it hold up if anyone ever asks.

What is the difference between an inventory write-off and a write-down?

A write-off removes the item's full value because it has no value left: it is destroyed, expired, stolen, or unsellable at any price. A write-down reduces the carrying value because the item is still sellable but is now worth less than what you paid, for example last season's product you will clear at half price. A write-off zeroes out the asset. A write-down partially reduces it.

The mechanics in QuickBooks are similar, but the amounts and the reasoning differ, and your accountant will care about the distinction. Under the lower of cost or market principle, inventory should not be carried at more than it can realistically fetch. If you can still sell it at some price, write it down. If you cannot sell it at all, write it off.

How do I write off inventory in QuickBooks Online?

Use an Inventory Quantity Adjustment. Go to New, then Inventory Qty Adjustment under Other. Set the adjustment date to the day you discovered the loss, choose the Inventory adjustment account (this is the expense account the loss will hit, and you can create one named Inventory Shrinkage), then add each product and change the quantity on hand to the correct number. Enter a memo explaining the reason and save.

QuickBooks reduces the inventory asset by the cost of the units you removed and posts the same amount to the adjustment account you chose. Check the account you selected before you save, because QuickBooks will happily default to whatever was used last time, and a write-off dumped into the wrong account is invisible until year-end.

If the value dropped but the quantity did not (a write-down rather than a write-off), QuickBooks Online does not offer a value-only adjustment in the standard plans, so this is usually handled with a journal entry instead: debit the write-down expense account, credit inventory asset.

How do I write off inventory in QuickBooks Desktop?

Go to Vendors, then Inventory Activities, then Adjust Quantity/Value on Hand. Set the adjustment type to Quantity, Total Value, or Quantity and Total Value depending on what changed. Pick an adjustment account, which should be your inventory shrinkage or write-off expense account, set the date, and enter the new quantity or value for each item.

Desktop's advantage here is that it will adjust value as well as quantity, so a genuine write-down is easy to record without a manual journal entry. As in Online, add a memo explaining what happened. Six months later, "adjustment" tells you nothing and "flood damage in the back storeroom, 12 units, photos on file" tells you everything.

What account should an inventory write-off go to?

Post routine write-offs to a Cost of Goods Sold account, typically named Inventory Shrinkage, Spoilage, or Inventory Write-Off. Shrinkage, breakage, and spoilage are part of the cost of doing business in a company that holds stock, and putting them in COGS keeps your gross margin honest by showing what the inventory actually cost you relative to what you sold.

A large, unusual loss (a fire, a theft, a discontinued product line) is sometimes posted to its own expense account below the gross profit line instead, so one bad event does not make a normal month's margin look terrible. Ask your accountant which treatment they want before you book something big. Either way, do not net it against sales; the loss belongs on the expense side where it can be seen.

Can I deduct written-off inventory on my taxes?

Generally, yes. Inventory you can no longer sell reduces your taxable income through cost of goods sold, but the deduction is not automatic and it is not something you can simply assert. You need to show that the inventory was genuinely disposed of or genuinely worthless, and you need contemporaneous records.

Practically, that means: document what was written off, how many units, at what cost, why, and what happened to it. Photos help. A disposal receipt from a hauler or a donation receipt from a charity helps more. If the goods were stolen, a police report matters. Talk to your CPA about the specific treatment, especially for a large loss, because rules differ for donated goods versus destroyed goods.

How do I record inventory that was stolen?

Record it the same way mechanically, as an inventory adjustment that reduces quantity on hand and posts the cost to an expense account, but use a separate account or at least a clear memo so theft is not buried in ordinary shrinkage. Date the entry to when you discovered the loss.

File a police report and keep it with your records. If you carry insurance and receive a payout, that reimbursement is recorded separately as income or as an offset against the loss, not netted silently against the write-off. Two events happened: you lost inventory, and later you got paid. Record both so the trail is complete.

How do I find the cost to write off if I do not track inventory in QuickBooks?

Use the cost you actually paid, which comes off the supplier invoice, not the price you were going to sell it for. Plenty of small businesses expense purchases as they buy and only true up inventory at year-end, which means the original cost is sitting in a stack of vendor bills rather than in an item record. Pull the invoice for the batch in question and use the unit cost from it. If you are working through a pile of supplier paperwork, you can extract the line items and unit costs from the invoice PDFs rather than retyping them, then use those figures for the adjustment.

Once you have the cost, the entry is a simple journal entry: debit the write-off expense account, credit the inventory asset account. If you do not carry an inventory asset at all because you expense purchases immediately, there is nothing to write off; the cost already hit your books when you bought the goods. In that case the write-off is a physical event, not an accounting one, though you should still document it.

When should I do an inventory write-off?

Record the write-off in the period you discover the loss, not the period you get around to counting. If a physical count in December turns up 40 units missing that vanished sometime during the year, the entry is dated December, when you learned of it. Deferring it into next year to protect this year's numbers is exactly the kind of thing an auditor looks for.

Most businesses that hold real stock do a physical count at least annually and reconcile it against QuickBooks. Retailers and restaurants often count monthly or quarterly. The write-off is the entry that makes the books agree with what is actually on the shelf, and the longer you wait, the harder it is to explain what happened.

Keeping the underlying purchases straight

An inventory write-off is only as accurate as the purchase data underneath it. If supplier payments were never categorized properly, or a whole quarter of statements never made it into QuickBooks, your inventory asset is wrong before you touch it. Getting every purchase in is the first step: converting your PDF bank statements to QuickBooks puts every supplier payment in as a dated line you can code to inventory or COGS.

For the ongoing side of this, see recording inventory purchases and COGS, and if you are cleaning up a year of neglected books before a count, the QuickBooks cleanup checklist covers the rest of the sweep. Businesses that carry stock in volume, like restaurants and breweries, live and die by getting this right, because their whole margin sits in the difference between what they bought and what they actually sold.