Inventory Adjustments and Write-Offs: How the Process Works

No inventory count is perfect forever. Items get damaged, miscounted, mislabeled or lost in the system, and every business that stores goods needs a clear way to correct the record. An inventory adjustment changes the on-hand quantity in your system to match reality; a write-off removes value for goods that can no longer be sold. Doing both with discipline protects your financial statements and your customer relationships.

Why adjustments happen

• Receiving errors: the quantity or SKU was recorded incorrectly at the dock.
• Picking or putaway errors: goods were moved to the wrong location or shipped as the wrong item.
• Damage: handling, water, pests or crushing in storage.
• Expiry or obsolescence: especially with dated or seasonal goods.
• Shrinkage: theft or unexplained loss. See our guide on inventory shrinkage causes and prevention.

The basic workflow

1. Detect. A cycle count, a customer complaint or a pick exception reveals a variance. Regular cycle counting finds problems earlier than an annual count.
2. Investigate. Recount, check recent receipts and shipments, and look at adjacent locations before changing any number.
3. Assign a reason code. Examples: damaged, miscount, mislabeled, expired, found. Reason codes make trends visible.
4. Approve. Set thresholds so small adjustments are handled by supervisors and larger ones require client or management approval.
5. Record and document. Capture photos, counts and notes. Keep them with the adjustment record.
6. Communicate. If you use a 3PL, you should receive a clear report of what changed and why.

Adjustment vs write-off

An adjustment corrects quantity. A write-off removes the value of goods that cannot be sold. Treatment for accounting and tax purposes is a question for your accountant, but operationally you should know which items are physically in the building, which are quarantined, and which are headed for disposal, donation, return to vendor or liquidation.

Controls that reduce adjustments

• Scan at every touch point: receiving, putaway, pick and ship.
• Use unique location labels and enforce them.
• Slot fast movers where they are easy to find and pick.
• Review adjustments by reason code monthly and fix the top cause.
• Keep damaged goods in a marked quarantine area, not in pick locations.

What to ask your 3PL

Ask how they report variances, who can approve adjustments, how fast they investigate, and whether adjustments appear in your client portal or in a periodic report. Strong warehouse receiving practices prevent many errors before they start.

Track the right metric

Inventory accuracy rate is the share of locations or SKUs where system and physical counts match. A rising number of adjustments is a signal to look at process, not just to correct the data.

Need help?

If you want clear reporting on your stock, see our warehousing services or request a quote.

Frequently asked questions

What is an inventory adjustment?

It is a change to the on-hand quantity in your system so it matches the physical count, usually recorded with a reason code and an approval.

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

An adjustment corrects the quantity. A write-off removes the value of goods that cannot be sold, such as damaged or expired items. Ask your accountant how to treat each.

How can I reduce inventory adjustments?

Scan at every handling step, use clear location labels, run regular cycle counts and review adjustments by reason code to find and fix the main cause.