A Beginner’s Guide To Inventory Shrinkage

If you’ve ruled out theft and administrative errors, investigate whether your supplier is abiding by your contract and that your numbers match up. The next most common reason for inventory shrinkage is administrative, at 15.4%. This includes simple errors adjustment for inventory shrinkage on the part of your staff such as miscounting, paperwork mistakes, or not factoring in things like inventory turnover ratio. Limiting shrinkage is a vital part of inventory control, and it all comes down to being better organized as a business.

Sometimes shrinkage gets reversed if previously missed items are found – and then a negative shrinkage entry is correct. Like a ship sailing in a strong wind, inventory sometimes needs small adjustments to stay on course. As with most procurement and accounting processes, inventory adjustments are greatly simplified when supported by the use recording transactions of a comprehensive procurement solution with an inventory management module. Decision making, reporting, auditing, and budgeting can all be skewed to disastrous levels if your team is operating with incomplete or inaccurate information. And one of the most critical parts of any successful inventory system is the use of inventory adjustments.

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Record the entry to close the temporary expense and accounts with debit balances. record the entry to close the temporary cash basis vs accrual basis accounting revenue and accounts with credit balances. Shrinkage has a cost – and that cost need to be recognized.

Shoplifting , employee theft/employee inventory theft, and vendor fraud can all deplete your actual inventory. A Journal is a record of when a transaction has taken place and what are the accounts that what are retained earnings were affected due to this transaction. A journal entry is record of the date of transaction and the account from which the has been credited and to which account the transaction must be recorded.

Software Features

Here’s what inventory shrinkage refers to and how to get it under control. Accounting Accounting software helps manage payable and receivable accounts, general ledgers, payroll and other accounting https://business-accounting.net/ activities. Common causes of inventory shrinkage are theft, spoilage, obsolescence, damage, and display . Cracking down on theft will not necessarily reduce these other factors.

Employee training is crucial for preventing shoplifting, explains RGIS Security, a firm that provides security services to retailers. Training your employees to recognize signs of likely shoplifters and requiring employees to greet customers in the store can help cut down on shoplifting. Employee screening can help you reduce employee theft, and auditing can identify pricing errors that would otherwise contribute to shrinkage from paperwork errors. The loss of inventory may be nigh unavoidable in an imperfect world, but that doesn’t mean you have to let it cut too deeply into your bottom line. You can greatly simplify your inventory and supply chain management by installing a one-stop software package that automates critical everyday procurement functions. Divide the difference by the inventory amount to obtain the inventory shrinkage rate. Subtract this amount from the inventory amount listed in your accounting records.

Loss Prevention

Inventory is complicated to manage, so it’s not surprising that units get lost in the shuffle. Some adjustment for inventory shrinkage is unavoidable, particularly in larger operations. However, improving your administrative processes should help prevent some products from disappearing. Vendor or supplier fraud is less common — comprising 3.7% of inventory shrinkage cases — but it does happen.