However, if the inventory shrinkage is determined to be significant, the loss must be reported on the income statement separately from cost of goods sold. Just make sure the loss is not double-recorded in this case by excluding the value of the stolen inventory from cost of goods adjustment for inventory shrinkage sold. Record an adjusting entry to balance the inventory account with the physical count. An entry must be made in the general journal at the time of loss to account for the shrinkage. Determine whether or not the loss is large enough to significantly affect your business.

adjustment for inventory shrinkage

The inventory account must be reconciled at the end of each accounting period to account for the discrepancy how to hire an accountant in inventory count. Generally, this is made as an adjustment to inventory and cost of goods sold.

Example Of Inventory Shrinkage

ACME Inc.’s accounting records show $1,500,000 in inventory. After doing a physical inventory count, the company determines it has $1,470,000 in inventory https://business-accounting.net/ on hand; therefore, the inventory shrank by $30,000. To determine the shrinkage rate, divide the total shrinkage by the total recorded inventory amount.

  • The inventory account must be reconciled at the end of each accounting period to account for the discrepancy in inventory count.
  • Just make sure the loss is not double-recorded in this case by excluding the value of the stolen inventory from cost of goods sold.
  • Record an adjusting entry to balance the inventory account with the physical count.
  • However, if the inventory shrinkage is determined to be significant, the loss must be reported on the income statement separately from cost of goods sold.
  • Generally, this is made as an adjustment to inventory and cost of goods sold.
  • An entry must be made in the general journal at the time of loss to account for the shrinkage.

However, a larger loss will be reported as a separate line on the income statement. How the loss is reported is left to the discretion of management. Divide the difference by the amount of stock recorded in the accounting books to get the percentage of inventory shrinkage. When a business takes a physical count of its inventory there is normally an unexplained difference between the physical count and the inventory accounting how to hire an accountant records. These differences might be due to inventory being stolen by employees, shoplifting by customers, or inventory damaged and disposed of without being recorded. Whatever the reason there is a discrepancy referred to as inventory shrinkage which needs to be accounted for to reconcile the accounting records with the physical count. Textbooks may change the balance in the account Inventory through the closing entries.

Deducting The Loss In Cogs

Your determination can affect how the inventory shrinkage is recorded. If the loss adjustment for inventory shrinkage is relatively small, it should be recorded as part of the cost of goods sold.

adjustment for inventory shrinkage