Does anyone depreciate inventory at the end of the year?

tonjunee · ‎May 09, 2020

I don't see this post show up anywhere or on youtube. I think it might go under the category of depreciating asset, but I'm not sure.

How would you depreciate inventory?

This is to file T2 taxes on the schedule 1 form line 117.

Rochelley · ‎May 11, 2020

Hello @tonjunee ,

I believe you may be getting some terms confused. You do not depreciate inventory; rather you do a physical count once a year, and enter an inventory adjustment for the variance between what was on your books and what you actually have in your possession. The differences could represent a lot of different things, depending on the type of business; theft, old or obsolete and unsellable, give aways (in which case you would use Advertising as your write-down account), etc. or any other reason which you are aware that has affected your physical inventory numbers. This inventory adjustment to actual can be put in an ordinary expense account or COGS, whatever works best for your business.

However, your fixed assets are depreciating each year. CRA has determined what types of assets go into what classes, and each class has a pre-determined rate of depreciation per year. For tax purposes, CRA calls it CCA (Capital Cost Allowance). The accounting entry for this is to Debit a Depreciation Expense account, and CR the fixed asset account by the rate of CCA allowed in the year, thus reducing it's book balance. If you sell a fixed asset, any cash you receive for it that exceeds the book value, is posted to a Gain on Sale of Fixed Assets other income account, or if you receive less cash than the book value of the asset, the difference is posted to Loss on Sale of Fixed Assets expense account. Some people combine the two into one account and call it Gain/Loss on Sale of Fixed Assets, using income or expense account, depending on which one is most favourable looking to you on the P & L.

Many people leave these entries to their external accountants as they can be a bit tricky if you are not familiar with all the rules. Most depreciating assets are also subject to the half-year rule, meaning that in the year of acquisition and the year of disposition, you are only entitled to depreciate 50% of what you would normally depreciate. So if the depreciation rate for a particular type of asset is 30%, you would only be able to depreciate 15% in the year of acquisition or disposition.

Here is a link from CRA that may help you: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partners...

Hope this helps somewhat. Good luck!

View solution in original post

Rochelley · ‎May 11, 2020

Hello @tonjunee ,

I believe you may be getting some terms confused. You do not depreciate inventory; rather you do a physical count once a year, and enter an inventory adjustment for the variance between what was on your books and what you actually have in your possession. The differences could represent a lot of different things, depending on the type of business; theft, old or obsolete and unsellable, give aways (in which case you would use Advertising as your write-down account), etc. or any other reason which you are aware that has affected your physical inventory numbers. This inventory adjustment to actual can be put in an ordinary expense account or COGS, whatever works best for your business.

However, your fixed assets are depreciating each year. CRA has determined what types of assets go into what classes, and each class has a pre-determined rate of depreciation per year. For tax purposes, CRA calls it CCA (Capital Cost Allowance). The accounting entry for this is to Debit a Depreciation Expense account, and CR the fixed asset account by the rate of CCA allowed in the year, thus reducing it's book balance. If you sell a fixed asset, any cash you receive for it that exceeds the book value, is posted to a Gain on Sale of Fixed Assets other income account, or if you receive less cash than the book value of the asset, the difference is posted to Loss on Sale of Fixed Assets expense account. Some people combine the two into one account and call it Gain/Loss on Sale of Fixed Assets, using income or expense account, depending on which one is most favourable looking to you on the P & L.

Many people leave these entries to their external accountants as they can be a bit tricky if you are not familiar with all the rules. Most depreciating assets are also subject to the half-year rule, meaning that in the year of acquisition and the year of disposition, you are only entitled to depreciate 50% of what you would normally depreciate. So if the depreciation rate for a particular type of asset is 30%, you would only be able to depreciate 15% in the year of acquisition or disposition.

Here is a link from CRA that may help you: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partners...

Hope this helps somewhat. Good luck!

tonjunee · ‎May 12, 2020

Hi @Rochelley.

Thanks for the clarification. I was wondering why depreciating inventory isn't commonly found online. I think I will go with the COGS method.

I've already done the CCA for fixed assets with 50% depreciation so that is good. It's just with this deprecation of inventory that threw me off.

Again, thank you and I will implement the COGS method.

:)

Eleanor Cleverence · ‎October 10, 2025

Depreciating inventory doesn't quite fit within standard accounting practices since inventory isn't usually treated as a depreciable asset. What you're dealing with are inventory write-downs or adjustments taht reflect obsolescence or market value changes. For filing T2, you're likly thinking about adjustments for obsolete stock, which impacts your cost of goods sold (COGS) rather than direct depreciation.

Here's what you cando: regularly assess your inventory, find items that have lost value, and write down their value accordingly. This adjustment will show up as an expense on your financial statements, impacting your net income and thus your taxes. You’ll wanna make sure your tracking is spot on; having good inventory management systems can really make a difference here. I've had to tweak this once when the software didn't sync right, hahaha. Maybe look into software that syncs smoothly with your erp, like QuickBooks, to track these changes efficiently.

Remember, handling inventory write-downs can be a bit tricky or confusing, especially for tax purposes, so chatting with an accountant familiar with your industry and T2 filing requirements can really help ya navigate the process effectively.

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Does anyone depreciate inventory at the end of the year?