Not every inventory reduction has the same cause
A missing unit, damaged return, expired product, obsolete component, and promotional giveaway can all reduce inventory but tell different operating stories. Use reason codes so finance can distinguish them.
That improves both accounting support and operational accountability.
Require evidence for material write-offs
Keep count sheets, damage reports, disposal records, photos where useful, warehouse approvals, customer return records, and any recovery or insurance information. The documentation should show what happened to the quantity and why it is no longer saleable at the prior value.
High-value write-offs should receive higher approval.
Reconcile quantity and value together
Removing units from the inventory system should also update the accounting value according to the company's costing method. If the subledger and general ledger move separately, the books can remain wrong even after the warehouse count is corrected.
Review the resulting effect on cost of goods sold or write-off accounts.
Track shrinkage as a management metric
Recurring shrinkage by warehouse, product, channel, or cause can reveal receiving problems, theft, packaging issues, or stale inventory. Trend the dollar amount and rate rather than treating each adjustment as isolated cleanup.
Finance can help quantify the issue while operations fixes the root cause.
Questions buyers usually ask
What is inventory shrinkage?
It is the difference between inventory the records say should exist and the inventory actually available, often caused by loss, theft, damage, errors, or other unexplained reductions.
Should damaged and obsolete inventory be tracked separately?
Yes when material. Separate reason codes make the accounting easier to support and help operations understand why inventory value is being lost.
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