Inventory loss (also known as inventory shrinkage or shrink) is a big problem for any business that carries physical goods. Without controls and monitors in place there is no way to trace the root causes that created the shrinkage in your business. It is estimated that companies loose 6% of their total annual revenue due to employee fraud and abuse. To help with this problem, we will look at techniques to combat inventory shrink. We’ll also take a look at the internal and external forces that may be perpetuating the losses.
What is Inventory Shrinkage?
Inventory shrink is a loss of goods either due to theft, damages/spoilage or administrative errors on items moving from a manufacturing site to an end customer. The shrinkage can be referred to as a hit to the margin or loss in profit.
How Do We Record Inventory Shrink?
Somewhere between your last cycle count to the current recording period, your business may have experienced some inventory losses. In other words, the physical inventory you have on hand today is less than what was recorded on your books. To account for this loss of inventory via the perpetual accounting method, you would: increase the cost of goods sold and decrease the inventory by the difference for the recording period.
Your balance sheet would show a credit to the inventory line item for the value that was lost. Showing that you have incurred higher expenses (cost of goods) and a lower gross profit will lower your taxable income. However, you might choose to record your shrinkage separately instead of including it into your costs of good sold. If so, you would need to file a claim with the Internal Revenue Service (IRS) using Form 4684 if you are located in the United States.
To Read More Go to Original Article
