Accounting for Inventory Loss
Businesses that have inventory on hand must account for inventory losses at the end of an accounting period. Inventory losses are due to such things as theft, obsolete merchandise and broken or damaged goods. Businesses are required to take an on-hand physical inventory count of all merchandise at least once a year, and an adjustment to inventory is made based on the loss discovered.
Other People Are Reading
-
Inventory Methods
-
Companies with inventory use one of two common methods for accounting for inventory: the periodic method and the perpetual method. The periodic method records all inventories into one account and it remains in the account until a physical inventory count is taken. When this occurs, the inventory account is credited for the difference. The perpetual method is a computerized method that records all inventories when they are purchased and as they are sold the inventory gets credited out of the account immediately.
Sales Methods
-
Companies use different types of methods to account for the sale of inventory. One is FIFO; which stands for first in, first out. This means the first inventory purchased is the first inventory sold. LIFO is another method; it stands for last in, first out. This method states the last inventory purchased is the first sold. Other companies use a method called weighted average, which measures the sale of goods on an average cost of the goods.
-
Obsolete Merchandise
-
When a company takes a physical inventory count at the end of a period, obsolete merchandise is often discovered. When this happens, the difference in cost needs to be recorded on the books to keep the inventory account as accurate as possible. If a company has 100 items recorded on the books for $10 each, but they figure the items are really worth only $6 each, an adjusting entry needs to be made. In this case an entry of $400 would be debited to the Cost of Goods Sold account and $400 would be credited to the Inventory account. This reduces the cost of inventory shown in the bookkeeping records.
Damaged Goods
-
Often a company accepts returns that are damaged goods. These goods are sometimes returned to the manufacturer, but not always. If they are not returned to the manufacturer, the company must write the damaged goods off so they are not part of the inventory count. To do this the journal entry would be a debit to Cost of Goods Sold and a credit to Inventory.
Theft
-
No matter how good a company’s internal controls are, theft is a normal part of everyday business to most companies. The difference between what the inventory is supposed to be and what it is calculated at is usually because of theft by employees and customers. The inventory account needs to be adjusted because of this. When a physical inventory count is taken, the Cost of Goods Sold account is debited and the Inventory account is credited.
-
References
- Photo Credit Calculator image by Alhazm Salemi from Fotolia.com
