When there is a decrease in inventory between the last count and the current count, what should be done?

When there is a decrease in inventory between the last count and the current count, what should be done?

• A. Debit cost of goods sold, and credit inventory
• B. Ignore the decrease as it may be due to minor discrepancies
• C. Adjust the cost of goods sold against the inventory expense
• D. Make no adjustments and continue with the previous inventory value

Answer: (A)

When inventory drops from one count to the next, treat the loss as shrinkage and reflect it as an expense by increasing cost of goods sold and decreasing the inventory asset. The proper entry is to debit Cost of Goods Sold for the amount of the decrease and credit Inventory for the same amount. This keeps the financial statements accurate: the asset side shows the reduced stock, and the expense side records the cost associated with the goods that are no longer on hand. This approach aligns with the idea that the cost of goods that disappeared should be charged in the period they disappeared, not kept as part of the old inventory value. Ignoring the decrease would overstate assets and understate expenses, leading to a distorted picture of profitability. Saying to adjust against an “inventory expense” isn’t the standard practice, since the recognized cost should flow through Cost of Goods Sold. And continuing with the previous inventory value likewise misstates both assets and COGS.

When inventory drops from one count to the next, treat the loss as shrinkage and reflect it as an expense by increasing cost of goods sold and decreasing the inventory asset. The proper entry is to debit Cost of Goods Sold for the amount of the decrease and credit Inventory for the same amount. This keeps the financial statements accurate: the asset side shows the reduced stock, and the expense side records the cost associated with the goods that are no longer on hand.

This approach aligns with the idea that the cost of goods that disappeared should be charged in the period they disappeared, not kept as part of the old inventory value. Ignoring the decrease would overstate assets and understate expenses, leading to a distorted picture of profitability. Saying to adjust against an “inventory expense” isn’t the standard practice, since the recognized cost should flow through Cost of Goods Sold. And continuing with the previous inventory value likewise misstates both assets and COGS.