Handling Damaged Stock and Write-offs

The safest way to handle damaged stock is to preserve a complete chain of custody. Remove the units from sellable availability, identify the item and location, record the reason and evidence, decide whether value can be recovered, obtain the right approval, and then post the quantity and accounting treatment. A quick negative adjustment without that trail makes stock accuracy look better while weakening accountability.

This guide deals with operational control, not tax or accounting advice. Finance should confirm the treatment for the entity and reporting framework. Start from the inventory systems service, use the inventory resource hub for related controls, and pair this process with the clean stock-count guide.

1. Create a non-sellable state immediately

When damage is discovered during receiving, storage, picking, a return or a count, the first control is availability. Put the units in a physical quarantine area and a matching system location or status. Do not leave them in the normal bin with a note in chat. The record should prevent allocation while the decision is pending and should preserve the original receipt, order, lot, serial or transfer reference where one exists.

2. Record evidence at the point of discovery

Use a damage record with item code, description, quantity, unit of measure, location, date, discoverer, source transaction and reason code. Add photographs when condition matters, and capture lot, serial or expiry details where traceability applies. If damage arrived from a supplier or carrier, record packaging condition and the notice deadline before the evidence is lost.

• Use controlled reason codes such as supplier damage, transit damage, handling damage, expiry, quality failure or customer return.
• Keep free text for useful context, but do not rely on free text as the only classification.
• Link the record to a receipt, delivery, return, transfer, count or manufacturing order.
• Record whether insurance, supplier credit or another recovery may apply.
• Name the person who can release, return or dispose of the stock.

3. Decide whether the item still has recoverable value

Damage does not always mean zero value. A sealed outer carton may be replaceable; a component may be recoverable; a product may be saleable with a disclosed condition; or a supplier may accept a return. Estimate the expected recovery route before disposal. IFRS IAS 2 describes inventory measurement at the lower of cost and net realisable value and recognises inventory write-downs and losses as expenses in the relevant period. Finance should determine how that principle applies to the actual facts.

4. Keep operational and accounting approvals distinct

Operations can confirm quantity, condition and disposal, but finance owns the value and account treatment. Use an approval threshold that reflects risk without forcing senior approval for every minor incident. The approval should show quantity, current recorded value, expected recovery, proposed reason, destination and evidence. No one should approve their own unexplained adjustment when practical segregation is possible.

5. Post a traceable stock movement

Use the inventory function intended for scrap, loss, return or adjustment rather than deleting a line or overwriting on-hand quantity. Odoo, for example, documents moving unusable goods to a virtual scrap location so they are removed from physical inventory while the movement remains visible. Xero notes that item quantities and values can be adjusted after a stocktake or when goods are damaged. The exact feature differs by system; the control objective is the same: preserve the transaction and its reason.

6. Reconcile supplier, insurance and disposal outcomes

A supplier return is incomplete until the credit or replacement agrees to the physical movement. An insurance claim should stay linked to the incident without assuming the recovery. Disposal should have evidence appropriate to the risk, such as a collection note, recycling receipt or witnessed destruction record. Review open quarantined items weekly so unresolved units do not become a hidden warehouse.

Worked control example

A receiving team finds six damaged units in a delivery of sixty. It receives the fifty-four usable units to normal stock and the six units to quarantine against the same receipt. The receiver records photographs and the carrier reference. Purchasing requests supplier credit. The supplier accepts four units and rejects two because of packaging evidence. The accepted units move to supplier return; the other two are approved for scrap after finance reviews their recorded value. The system now explains the usable receipt, the claim, the return and the loss without a balancing adjustment.

Monthly review

Review damage quantity and value by reason, item, supplier, carrier, warehouse and process step. Investigate repeated causes and unusually large manual adjustments. Reconcile the quarantine location to physical units, supplier credits to returns, and scrap transactions to the finance account selected for losses. The purpose is not to eliminate every incident; it is to make each loss visible, controlled and useful for prevention.

Sources checked

• IFRS Foundation: IAS 2 Inventories
• Odoo: Scrap inventory
• Xero South Africa: Inventory management

This resource provides general implementation guidance. Verify platform settings, tax, legal, payment and operational requirements against the current business context before making a live change.