Journal Entries for Inventory Adjustments (Shrinkage, Obsolescence & Physical Count)
Quick Answer: Inventory adjustments correct the general ledger to match physical counts. Shortages (shrinkage) debit an expense and credit inventory. Obsolescence write-downs reduce inventory to net realizable value. All adjustments flow through Cost of Goods Sold or a dedicated inventory adjustment account.
1. Physical Count Adjustments
When physical count differs from GL balance:
Inventory shortage found:
Dr. Inventory Shrinkage Expense — $1,200
Cr. Inventory — $1,200
Inventory surplus found:
Dr. Inventory — $400
Cr. Inventory Adjustment (COGS) — $400
2. Inventory Shrinkage
Normal shrinkage from theft, damage, or spoilage:
Recording shrinkage expense:
Dr. Inventory Shrinkage Expense — $2,500
Cr. Inventory — $2,500
Alternative (credited to COGS directly):
Dr. Inventory Shrinkage Expense — $2,500
Cr. Cost of Goods Sold — $2,500
3. Obsolescence Write-Downs
When inventory NRV falls below cost (IAS 2 / ASC 330):
Write-down to NRV:
Dr. Inventory Write-Down Expense — $5,000
Cr. Inventory Obsolescence Reserve — $5,000
Direct write-down method:
Dr. Loss on Inventory Write-Down — $5,000
Cr. Inventory — $5,000
4. Net Realizable Value Adjustments
| Scenario | Cost | NRV | Adjustment |
|---|---|---|---|
| Finished goods | $10,000 | $8,500 | Write down $1,500 |
| Raw materials | $4,000 | $4,500 | No adjustment (cost lower) |
| WIP | $6,000 | $5,200 | Write down $800 |
5. Reversal of Write-Down
If NRV subsequently increases (limited to original write-down):
Reversal entry:
Dr. Inventory Obsolescence Reserve — $1,000
Cr. Recovery of Inventory Write-Down — $1,000
IFRS permits reversal; US GAAP does not permit reversal.
6. Damaged Goods
Writing off damaged inventory:
Dr. Loss on Damaged Inventory — $800
Cr. Inventory — $800
If insurance recovery expected:
Dr. Loss on Damaged Inventory — $800
Dr. Insurance Receivable — $500
Cr. Inventory — $800
Cr. Gain on Insurance Recovery — $500
