A retailer eagerly waits for new stock, only to find a mismatch in their system – they’re either out of stock or, worse, overloaded with unsold items.
Nearly 62% of businesses face financial strain due to poor inventory tracking. That’s where inventory adjustments account types make all the difference.
By accurately recording adjustments like damaged goods, missing items, or returns, these account types ensure your stock data reflects reality.
With the right inventory adjustments account types, you can avoid costly surprises, keep your shelves just right, and make smarter decisions that benefit your bottom line.
Let’s look at the different types of inventory adjustments account types, making it easier to keep your inventory accurate and manageable.
What are Inventory Adjustment Account Types?
Inventory adjustment account types are categories in accounting that capture any changes in inventory levels, helping keep stock records accurate and up to date.
They’re essential for reflecting real stock quantities, as inventory can fluctuate due to various factors like damaged items, returned goods, or administrative corrections.
By using these specific accounts, businesses can track and manage inventory changes with precision, ensuring their records align with actual stock on hand.
This process not only supports better financial reporting but also helps in making informed inventory management decisions.
Why do You Need Inventory Adjustment?
Inventory adjustments are necessary whenever the physical count of items doesn’t align with the recorded inventory.
This mismatch can occur for various reasons, often because items aren’t used in fulfillment but are affected by other factors instead.
This discrepancy, known as inventory shrinkage, has several common causes:
1. Misplacement
Items can be misplaced, especially in an unorganized storage area, causing discrepancies. If these items are found later, further adjustments are needed in the inventory adjustment accounts for loss.
2. Counting Errors
Mistakes in physical counts, such as overcounting or undercounting, often require adjustments to correct inventory records.
3. Theft
Stock lost to theft by employees or outsiders means actual inventory is lower than recorded, necessitating an adjustment in the inventory adjustment journal entry.
4. Waste
Expired or obsolete items, especially in sectors with perishable goods, should be removed from inventory, as they are no longer viable for sale.
5. Returns
If returns aren’t managed properly, they can lead to more physical stock than expected, requiring adjustments in the inventory adjustment account for loss.
6. Internal Use
When items are used internally, they should be deducted from the inventory count to accurately reflect their usage in the inventory adjustment journal entry.
7. Damage
Damaged items are unsellable and should be removed from inventory records to ensure counts remain accurate.
Regular inventory adjustments help maintain accurate stock data, providing a solid foundation for better decision-making in business.
Inventory Adjustment Account Types for Accurate Stock Control
Keeping inventory records accurate is crucial for smooth operations, and that’s where inventory adjustment accounts come into play.
These accounts are essential for managing stock levels that fluctuate due to various reasons like lost items, damages, or product returns.
Using the right inventory adjustment account types can help you capture these changes, ensuring your records align with reality.
Find out how these accounts work and why they’re a key part of smart inventory management.
1. Inventory Shrinkage Account
Missing stock? It happens – often due to theft, counting errors, or unknown losses.
In 2022, retail shrinkage rates increased from 1.4% to 1.6%, as reported by the National Retail Federation’s National Retail Security Survey.
Using an inventory shrinkage account, you can document any stock discrepancies that lower your actual count compared to records.
Regular physical inventory checks allow you to adjust for these losses.
When there’s a mismatch, you’ll log the value of the missing items in the shrinkage account, keeping your records clean and alerting you to recurring shrinkage issues that may need addressing.
With Teamship WMS, you can stay on top of inventory shrinkage and ensure your stock data aligns with what’s on hand.
2. Inventory Write-Off Account
Sometimes, items become unsellable due to spoilage, damage, or age.
When this happens, an inventory write-off account lets you remove these unusable items from your stock record, so they don’t inflate your inventory’s overall value.
By transferring the cost of obsolete items into the write-off account, you adjust for losses without affecting sales data.
Frequent reviews for damaged or expired stock ensure your inventory records are both accurate and reflective of available, sellable goods.
3. Inventory Revaluation Account
Market prices shift, and so can the value of your inventory.
For example, if costs rise or fall, your recorded inventory value might not reflect actual costs.
An inventory revaluation account helps adjust inventory values to align with market conditions.
This adjustment involves recalculating your inventory cost based on current prices, then transferring the difference into the revaluation account.
Regular revaluation, especially in industries with volatile prices, keeps your financial statements true to market conditions, providing a realistic snapshot of inventory worth.
4. Cost of Goods Sold (COGS) Adjustment Account
Not every inventory item reaches a customer; some may be used for internal purposes like marketing or sampling.
When items leave inventory without being sold, a COGS adjustment account records this usage.
By transferring these costs from inventory to the COGS account, you ensure that internal use doesn’t inflate your stock records.
This type of adjustment helps you maintain clarity over what’s truly available for sale, making it easier to track costs accurately.
5. Inventory Returns Account
The return rate for eCommerce orders can reach as high as 20-30%.
Customer returns are common, and if you don’t track them well, they can skew your inventory records.
The inventory returns account captures items that re-enter stock after a return, accurately adjusting levels to show these additions.
By logging returns separately, you can monitor the impact of customer returns on your inventory and gain insights into product quality or customer satisfaction issues.
It is particularly useful in industries with high return rates, keeping inventory levels realistic and reflective of actual stock.
Teamship WMS makes return management straightforward, so you can focus on sales, not stock issues.
Using these inventory adjustments account types is key for precise, reliable stock management.
With the right adjustments in place, your records stay up to date, reducing costly errors and providing insights that support better business decisions.
Achieve Complete Inventory Accuracy with Teamship WMS
Maintaining accurate inventory records can feel like a constant challenge, but Teamship WMS brings simplicity and clarity to the process.
Here’s how Teamship WMS helps you manage inventory confidently:
- Real-Time Tracking Across Warehouses
Teamship WMS gives you an up-to-the-minute view of stock levels, no matter how many warehouses you manage.
It means your records always match what’s on hand, helping you avoid surprises.
- Automated Adjustment Handling
From shrinkage to returns, Teamship WMS captures these adjustments automatically, so you don’t have to.
This hands-off approach helps prevent errors and keeps your inventory records accurate without added effort.
- Seamless Integration with Sales Channels
Teamship WMS connects directly with your e-commerce platforms, so stock levels update as orders come in, minimizing risks of overselling or stockouts.
With Teamship WMS, you get a clear, reliable picture of your inventory, giving you the confidence to make decisions that move your business forward.
Reach out to us and see the difference Teamship WMS can make for your inventory management.
Frequently Asked Questions
1. Can I make an inventory adjustment without expensing it?
Yes, you can make an inventory adjustment without expensing it in some cases.
For instance, adjustments for stock transfers or counting errors simply update inventory records without affecting expenses.
However, adjustments for shrinkage, damage, or obsolescence usually require expensing to accurately reflect losses.
It’s best to consult your accounting policies to handle adjustments correctly.
2. How do I make inventory adjustments from years ago?
To make an inventory adjustment from years ago, start by identifying the discrepancy and documenting the reason for the adjustment, such as errors, shrinkage, or loss.
Then, record an adjusting entry in your accounting system, specifying the current date and clearly noting it’s for a past period.
Adjusting past inventory requires careful documentation to avoid impacting current financials, so consult with your accountant to ensure compliance with accounting standards and to properly disclose any adjustments in your financial statements.
3. What is inventory valuation adjustment?
An inventory valuation adjustment is a modification in the National Income and Product Accounts (NIPAs) applied to corporate and proprietors’ income.
This adjustment aims to exclude inventory “profits,” which are treated similarly to capital gains rather than as earnings from current production activities.