How to Account for Stolen Inventory

Thứ bảy - 27/04/2024 00:20
A guide to assessing and recording inventory losses due to theftRetailers often employ special accounting treatments that aren't seen in other industries. Because inventory controls are so important to these companies, they have developed...
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Retailers often employ special accounting treatments that aren't seen in other industries. Because inventory controls are so important to these companies, they have developed several methods for tracking and accounting for the flow of inventory, from production to final sale. An important adjustment required from merchandising companies is accounting for inventory shrinkage, which is the difference between the physical inventory count and the amount of inventory recorded in the books. Inventory shrinkage can result from several factors, including theft by either customers or employees. Learning how to account for stolen inventory will allow you to balance your inventory account with the physical count.

Things You Should Know

  • Find the value of the missing inventory by comparing your actual inventory to the account balance on the books.
  • For minor losses, debit cost of goods sold and credit inventory for the value of the loss.
  • Report significant losses on your income statement.
Part 1
Part 1 of 2:

Loss Assessment

  1. Step 2 Compare the physical inventory count to the account balance on the books.
    In nearly all cases, the physical count will be lower (a higher count usually points to errors in the counting). This difference between the inventory on the books and physical inventory is referred to as inventory shrinkage.[2]
    • Be careful to attribute this shrinkage to the correct causes. A large shrinkage is cause for alarm and should be further investigated. However, you can't assume that all of the difference is due to theft.
    • Common causes of inventory shrinkage are theft, spoilage, obsolescence, damage, and display (items that have been put on display and are no longer fit for consumption). Cracking down on theft will not necessarily reduce these other factors.[3] Retail companies should have procedures and policies in place to deal with spoilage, damage, and obsolescence automatically if these cause significant shrinkage.
    • For example, imagine that in the previous example of a pet store, you look in your books and you are supposed to have 500 bags of dog food instead of the 450 you counted. Ask your employees about how many bags have been damaged and determine if this number could be due to factors other than theft.
  2. Step 3 Total the value of the missing inventory.
    In order to account for inventory shrinkage, you'll also need to determine the value of the inventory lost. Be sure to use the same values that were on the books for the inventory, not the sale price of the lost items. This also includes any other costs associated with the inventory lost, like shipping charges and direct labor.[4] If you use an electronic inventory system, chances are your system will be able to do this calculation for you.
    • Book value for inventory is calculated in different ways by different businesses. In general, valuation of inventory falls into one of three categories:
      • Last-in, first-out (LIFO). This method uses the cost of the items added to inventory most recently to value the inventory sold or lost. For example if 5 chairs were bought from a wholesaler at $50 each and then later 5 more were bought at $70 each, the business would use the $70 cost for the first five chairs sold and then the $50 cost for the next 5.
      • First-in, first-out (FIFO). This is the opposite of LIFO and assumes that the first inventory in is sold first. Using the same chair example, the first five chairs sold would be valued at a cost of $50 each and the last 5 at $70.
      • Average cost. This is a method that averages the cost of all of the inventory and values each item at that cost. In the chair example this would be calculated as ((5 chairs * $50 each)*(5 chairs* $70 each))/10 total chairs, which results in an average cost of $60 each.[5]
    • Using the same example from earlier, imagine your dog food costs $10 per bag wholesale (on average). Because you've lost 50 bags, your total inventory shrinkage is valued at 50*$10, or $500.
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Part 2
Part 2 of 2:

Accounting Entries

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