How to Deal with Inventory Shrinkage - dummies

How to Deal with Inventory Shrinkage

By Stephen L. Nelson

A chronic inventory headache that many business owners and business managers have to deal with is inventory shrinkage. QuickBooks 2012 can help you deal with this problem. It’s very likely, sometimes for the most innocent reasons, that your inventory records overstate the quantity counts of items.

When this happens, you must adjust your records. Essentially, you want to reduce both the dollar value of your inventory and the quantity counts of your inventory items.

Following is the journal entry that QuickBooks makes for you to record this event. This journal entry debits an appropriate expense account — in Journal Entry 9, the expense account is shrinkage expense — for $100. A journal entry also needs to credit the inventory account for $100.

Journal Entry 9: Recording Inventory Shrinkage
Account Debit Credit
Shrinkage expense 100
Inventory 100

Within QuickBooks, you don’t actually record a formal journal entry like the one shown here. You use something called a physical count worksheet to adjust the quantities of your inventory item counts to whatever they actually are. When you make this adjustment, QuickBooks automatically credits the inventory account balance and adjusts the quantity counts. QuickBooks also requires you to supply the expense account that it should debit for the shrinkage.

In the old days, businesses compared their accounting records with the physical counts of inventory items only once a year. In fact, the annual inventory physical count was a painful ritual that many distributors and retailers went through.

These days, most businesses have found that it works much better to stage physical inventory counts throughout the year. This approach, called cycle counting, means that you’re probably comparing your accounting records with physical counts for your most valuable items several times a year.

For your moderately valuable items, you’re probably comparing your inventory accounting records with physical counts once or twice a year. With your least valuable inventory items, you probably only irregularly compare inventory records with physical counts, and you may accept a degree of imprecision.

For example, rather than counting screws in some bin, you may weigh the bin and then make an estimate of the screw count. In any case, you want some system that allows you to compare your accounting records to your physical counts. Inventory shrinkage and inventory obsolescence represent real costs of doing business that won’t get recorded in your accounting records in any other way.