Inventory accounting: counts, landed cost, shrinkage, deposits, and returns

Take a physical count at least once a year, and more often for fast-moving or high-value stock. Compare it with the ledger by item. Investigate differences before adjusting: the cause may be a receiving error, an unrecorded sale, or theft. Record the adjustment with a note.

Do this before you trust gross margin. If inventory is wrong, cost of goods sold is wrong, and so is profit.

The cost of inventory is more than the supplier's price. Landed cost includes freight in, duties and tariffs, insurance in transit, and handling to get the product ready for sale. Adding these to the cost of the goods means margin reflects what it took to have the product on your shelf.

Say you buy 1,000 units at $8 each, paying $600 for freight and $400 in duties. Landed cost is $9,000 divided by 1,000, or $9 per unit. Costing at $8 would overstate margin by a dollar a unit.

Inventory that goes missing, is damaged, or becomes obsolete should be written down or off. Record the loss in the period you identify it, with the reason. Track shrinkage as a share of sales, and review slow-moving items quarterly, since old stock rarely sells at full price.

A deposit paid to a supplier before goods arrive is an asset, not a cost of goods. Track it by purchase order. When the goods arrive, move the deposit into inventory. If an order is cancelled, record the refund or the loss.

When you return goods or receive a supplier credit, reduce inventory by the cost of the returned units and reduce the payable or record a refund. Keep quantities, values, and payables in step.

Classify costs where they explain margin correctly. Costs directly tied to acquiring or producing the product belong in cost of goods sold. Selling, marketing, and administrative costs belong in operating expenses. Mixing them makes gross margin meaningless, so write down the rule and apply it.