Best Practices

October 26, 2025

6 min read

Books Automator Team

Inventory Depreciation: Proper E-commerce Bookkeeping for Obsolescence and Write-Downs

Aging or damaged stock needs to be valued correctly. Learn the best practices for automating inventory depreciation and write-downs to avoid overstating your assets.

Introduction: The Silent Killer of E-commerce Profits

Imagine your e-commerce warehouse: shelves stocked with products, ready for eager customers. Now, imagine a corner of that warehouse, slowly accumulating dust. Products that once flew off the virtual shelves are now stagnant. Trends have shifted, new models have emerged, or perhaps a seasonal item missed its window. This isn’t just unsold inventory; it’s obsolete inventory, and it’s a silent killer of your e-commerce profits.

Many small business owners focus intensely on sales and marketing, often overlooking a critical aspect of financial health: properly accounting for inventory depreciation and obsolescence. Without accurate write-downs, your balance sheet inflates, your Cost of Goods Sold (COGS) is understated, and your tax liability could be miscalculated. The good news? Modern bookkeeping automation tools can transform this complex challenge into a streamlined, insightful process. In this post, we’ll dive into how to identify, value, and properly account for obsolete inventory, leveraging automation to save you time, reduce errors, and ensure your financial statements reflect the true health of your business.

Understanding Inventory Depreciation and Obsolescence in E-commerce

In the fast-paced world of e-commerce, inventory doesn’t just sit; it ages. “Inventory depreciation” in this context often refers to the loss of value due to obsolescence, damage, or market changes, rather than the systematic expensing of a fixed asset. Obsolescence is particularly rampant:

Technological Shifts: A new smartphone model renders last year’s accessories less desirable.
Fashion & Trends: Apparel, home decor, or niche products can quickly go out of style.
Seasonality: Holiday decorations, summer apparel, or specific event merchandise lose value rapidly post-season.
Perishables/Expiry: Food, supplements, or cosmetics have finite shelf lives.

Why it matters:

Accurate Financials: Overstating inventory inflates your assets, making your business look more profitable than it is, which can mislead investors or lenders.
Correct COGS & Profit Margins: If you don’t write down obsolete inventory, your COGS will be understated, leading to an artificially high gross profit.
Tax Implications: Properly written-down inventory can reduce your taxable income, offering legitimate tax savings.
Informed Decision-Making: Knowing the true value of your inventory helps you make better purchasing, pricing, and liquidation decisions.

Common Pain Points: Manually tracking aging inventory is tedious and prone to errors. Business owners often delay recognizing losses, hoping for a miracle sale, which only compounds the problem and skews financial reporting.

Identifying and Valuing Obsolete Inventory: A Step-by-Step Approach

The first step to managing obsolete inventory is proactively identifying it and determining its true value.

Step 1: Implement Regular Inventory Reviews

Don’t wait until year-end. Schedule regular, perhaps quarterly or semi-annual, deep dives into your inventory data.

Leverage Your E-commerce Platform & IMS: Most e-commerce platforms like Shopify, BigCommerce, or WooCommerce offer basic inventory reports. For more robust insights, integrate with a dedicated Inventory Management System (IMS) like Cin7 (formerly DEAR Systems), Katana MRP, or Zoho Inventory.
Key Metrics to Monitor:
- Sales Velocity: How quickly is an item selling? Identify slow-moving SKUs.
- Last Sale Date: If an item hasn’t sold in 6-12 months (depending on your product cycle), it’s a red flag.
- Holding Costs: Calculate the cost of storing, insuring, and managing unsold inventory. This adds to the urgency of write-downs.
- Age of Inventory: Many IMS solutions provide “aging reports” that categorize inventory by how long it’s been in stock.

Real-world Example: You sell custom smartphone cases. Your IMS (e.g., Cin7 Core) flags 500 cases for a specific phone model that hasn’t sold in 9 months, and a new model has just been released. This is a prime candidate for obsolescence.

Step 2: Apply the Lower of Cost or Market (LCM) Rule

Once identified, you need to value the obsolete inventory for a write-down. Generally Accepted Accounting Principles (GAAP) and tax rules often require the “Lower of Cost or Market” (LCM) method.

Cost: What you originally paid for the inventory.
Market: This is typically the “Net Realizable Value (NRV)” – the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
The Rule: You must value the inventory at the lower of its original cost or its current market value (NRV).

Example Continued:

Original Cost: You paid $5 per phone case. Total cost: $2,500 (500 cases x $5).
Market (NRV): Due to the new phone model, you estimate you can only sell these old cases for $2 each after a clearance sale, with $0.50 per case in selling fees.
- Estimated Selling Price: $2.00
- Less Disposal Costs: $0.50
- Net Realizable Value (NRV): $1.50 per case.
LCM Application: The original cost is $5, and the NRV is $1.50. The lower of the two is $1.50.
Write-Down Amount: The difference is $3.50 per case ($5 - $1.50). Total write-down: $1,750 (500 cases x $3.50).

Automating Inventory Write-Downs and Bookkeeping Entries

Manually calculating write-downs and creating journal entries for hundreds or thousands of SKUs is a nightmare. This is where automation shines, transforming a laborious task into a streamlined process.

The Manual Headache

Without automation, you’d be:

Exporting inventory reports from your e-commerce platform.
Manually sifting through spreadsheets to identify slow-movers.
Calculating NRV for each item.
Manually calculating the write-down amount.
Creating a journal entry in your accounting software (e.g., QuickBooks Online or Xero) for each batch of obsolete items.
Risking errors, delays, and inconsistent application of policies.

The Automation Solution: Seamless Integration

The goal is to create a flow where your inventory data seamlessly informs your accounting, minimizing manual intervention.

Integrated Systems are Key:
- E-commerce Platform (Shopify, BigCommerce) feeds sales and stock levels.
- Inventory Management System (IMS) (e.g., Cin7, DEAR Systems, Katana MRP, Zoho Inventory) acts as the central hub for detailed inventory tracking, including aging reports, valuation, and sometimes even automated write-down suggestions.
- Accounting Software (e.g., QuickBooks Online, Xero) receives the financial impact of these inventory adjustments.
How Automation Works:
- Automated Reporting: Your IMS can be configured to generate “aging reports” or “obsolescence reports” on a scheduled basis, highlighting items that meet your criteria for potential write-down (e.g., no sales in X months).
- Valuation Assistance: Some advanced IMS solutions can help calculate NRV based on historical clearance sales data or user-defined parameters.
- Journal Entry Generation/Facilitation:
  - While most IMS won’t automatically post a write-down journal entry directly into your accounting software without review, they can generate the necessary data.
  - The IMS can provide a clear report with the SKU, quantity, original cost, NRV, and the total write-down amount.
  - You (or your bookkeeper) can then quickly create a single summary journal entry in QuickBooks Online or Xero:
    - Debit: Inventory Obsolescence Expense (or Cost of Goods Sold)
    - Credit: Inventory Asset
  - For example, in QBO, you’d go to + New > Journal Entry, enter the date, account names, and amounts.
- Integration Platforms: Tools like Zapier can connect various apps, though for complex inventory write-downs, native integrations between your IMS and accounting software are usually more robust and reliable. Many IMS solutions offer direct integrations with QBO and Xero.

ROI and Time-Saving Benefits:

Reduced Manual Effort: Save hours of spreadsheet work and manual data entry.
Improved Accuracy: Minimize human errors in calculations and data transfer.
Real-time Insights: Get a clearer, more current picture of your inventory value and financial health.
Better Decision-Making: Act quickly on obsolete stock, freeing up capital and warehouse space.
Compliance: Ensure your financial statements comply with accounting standards and tax regulations.

Best Practices and Avoiding Common Mistakes

Even with automation, strategic oversight is crucial.

Best Practices:

Establish a Clear Policy: Define what constitutes “obsolete” for your business (e.g., no sales in 12 months, product line discontinued). Document your write-down methodology.
Regular Physical Audits: Periodically compare your digital inventory records with physical counts to catch discrepancies, damage, or theft.
Proper Documentation: Keep detailed records of your write-down calculations, disposal methods (e.g., liquidation sale, donation, destruction), and any associated costs. Photos of damaged goods can be helpful.
Consult Your Accountant: Always discuss your inventory valuation and write-down policies with your tax professional or accountant to ensure compliance and optimize tax benefits.
Leverage Data Analytics for Forecasting: Use sales data, market trends, and even AI-driven tools within your IMS to improve demand forecasting and minimize future obsolescence.

Common Mistakes to Avoid:

Ignoring Obsolete Inventory: Hoping it will eventually sell, leading to inflated assets, higher carrying costs, and missed tax deductions.
Inconsistent Valuation Methods: Switching between methods without justification can lead to inaccurate financials and raise red flags with auditors.
Lack of Documentation: Without clear records, your write-downs may be challenged during an audit.
Not Integrating Systems: Relying on manual data transfer between your e-commerce platform, IMS, and accounting software is inefficient and error-prone.
Waiting Until Year-End: Proactive, regular write-downs provide more accurate real-time financials and spread the workload.

Key Takeaways

Proactive Recognition is Key: Don’t let obsolete inventory silently erode your profits. Regularly identify slow-moving or unsellable stock.
Accurate Valuation Matters: Use methods like Lower of Cost or Market (LCM) to properly value obsolete items for write-downs.
Automation is Your Ally: Integrate your e-commerce platform, IMS (like Cin7, DEAR Systems, Katana MRP, Zoho Inventory), and accounting software (QuickBooks Online, Xero) to streamline the entire process.
Benefits Beyond Compliance: Automation saves time, reduces errors, provides real-time insights, and supports better business decisions.
Maintain Best Practices: Supplement automation with clear policies, regular audits, and professional advice.

Next Steps for Your Business

Review Your Current Inventory: Start by running an aging report from your existing e-commerce platform or IMS. Identify your top 5-10 slowest-moving SKUs.
Assess Your Systems: Are your e-commerce, inventory, and accounting systems integrated? If not, research solutions like Cin7, DEAR Systems, Katana MRP, or Zoho Inventory that offer robust integrations with QuickBooks Online or Xero.
Define Your Obsolescence Policy: Work with your team to establish clear criteria for identifying obsolete inventory.
Consult a Professional: Discuss your inventory valuation and write-down strategy with your bookkeeper or accountant to ensure compliance and optimize tax benefits.
Map Out Your Automation Strategy: Plan how you can leverage technology to automate reporting and simplify the journal entry process for inventory write-downs.

Conclusion

Managing inventory depreciation and obsolescence is more than just a bookkeeping task; it’s a strategic imperative for any thriving e-commerce business. By embracing proper accounting principles and leveraging the power of automation, you can transform a potential financial drain into an opportunity for greater accuracy, efficiency, and profitability. Don’t let hidden costs undermine your success. Invest in smart bookkeeping practices and the right tools to keep your e-commerce business agile, financially sound, and ready for whatever the market brings.

Authored by Your Expert Bookkeeping Automation Consultant

Ready to Get Started?

Ready to modernize your bookkeeping? Start by identifying your biggest manual processes and researching available automation solutions. The future of efficient bookkeeping is here – and it’s more accessible than ever.

Need help choosing the right automation tools? Check out our integration guides or contact our team for personalized recommendations.

Have questions about bookkeeping automation? Found this article helpful? Share your thoughts and questions in the comments below, or reach out to our team for personalized guidance on your automation journey.