Inventory shrinkage: count missing stock before recording a loss

Inventory shrinkage is the gap between the stock you count and the stock your books say you have. Theft, damage, spoilage, counting errors or misplaced stock may explain it. Count and investigate first. Decide on the accounting entry afterward. Do not treat it as an ordinary sale cost or assume a certain dollar amount automatically allows a tax write-off. Both the cause and the reporting treatment need a check.

Shrinkage is a physical-count problem

Compare the counted quantity and its cost with the same items in the books. If the counted value is lower, the difference is shrinkage. Possible causes include theft by staff or outsiders, damage during storage or handling, spoiled goods, an earlier record or count error, or stock that is misplaced and may turn up later. This differs from cost of goods sold, which is the cost of the items actually sold to earn revenue. With shrinkage, stock is missing without a sale to explain it. A normal cost-of-goods-sold calculation can therefore coexist with missing stock. A physical count checks a different question.

A shrinkage percentage, worked through

Consider a retailer whose books show 500 units of a product on hand, at a cost of $12 each, for a book cost of $6,000. A physical count finds only 460 units actually on the shelf, at the same $12 cost, for a counted cost of $5,520. The difference is $6,000 minus $5,520, or $480. Dividing that difference by the book cost — $480 divided by $6,000 — gives a shrinkage rate of 8% for this product line during this count period. That 8% figure describes one product line over one count period. It is not a company-wide, ongoing constant, and a different product or a different count period can produce a very different percentage.

Small write-downs versus material ones

A write-down reduces the stock value in the books. General accounting guidance treats its reporting differently depending on size. Most small write-downs go into cost of goods sold without a separate explanation, as a normal business cost. Larger or unusual losses may change how someone understands the financial statements. These call for a separate expense and explanation, rather than being hidden in cost of goods sold. The business and accountant judge what is material, meaning important enough to affect the reader's understanding. The general sources behind this article do not set one fixed percentage.

What IT-473R does, and does not, tell you

The Canada Revenue Agency's (CRA) Interpretation Bulletin IT-473R describes older inventory-valuation methods. These used either the lower of cost and fair market value, or fair market value alone, applied consistently. Fair market value broadly describes what the stock would sell for in an open market. The bulletin is archived, and CRA says it will not update it. Interpretation bulletins generally do not have the force of law. It is cited here only to explain historical valuation terms, not as current binding guidance for a shrinkage loss. Confirm today's treatment with an accountant or current CRA guidance.

Investigating before writing off

A stock gap is a reason to investigate, not simply record a loss and move on. Check the count first. Was a shelf or storage location missed? Could a pending receiving document or internal transfer explain the units? Then ask whether this happened once, such as a damaged pallet, or keeps happening at one location. Those need different responses beyond an entry. Resolve these questions before recording a write-down. The entry changes the books but does not fix the cause. Keep a short note of what you checked and ruled out with the final entry. A later reviewer can then see the investigation, not just its result.

What Bookwits can and cannot do here

Bookwits checklists and tasks can organize the stock count and investigation. Documents can store count-sheet photos, supporting records and approvals with the client or location file. Bookwits is not an inventory-valuation ledger. It does not automatically calculate the shrinkage percentage or a cost-of-goods-sold adjustment. It also does not determine the tax treatment. The business and accountant make those decisions using the organized records.