Quick answer: Inventory is generally recorded as an asset when purchased. When inventory is sold, you typically record (1) revenue and (2) the related cost of goods sold (COGS), which reduces the inventory balance. Period-end adjustments often include write-downs, shrinkage, and count differences.
Inventory — journal entries (quick examples)
1) Purchase inventory on credit
| Account | Debit | Credit |
|---|---|---|
| Inventory | XXX | |
| Accounts payable | XXX |
2) Freight-in (capitalized into inventory)
| Account | Debit | Credit |
|---|---|---|
| Inventory | XX | |
| Cash / accounts payable | XX |
3) Sale of inventory (record revenue)
| Account | Debit | Credit |
|---|---|---|
| Cash / accounts receivable | XXX | |
| Revenue | XXX |
4) Sale of inventory (record COGS)
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | XX | |
| Inventory | XX |
5) Inventory write-down / obsolescence
| Account | Debit | Credit |
|---|---|---|
| Inventory write-down expense (or COGS) | XX | |
| Inventory | XX |
6) Physical count adjustment (shrinkage or overage)
Depending on your accounting policy, count differences are often recorded through COGS or a separate inventory variance account.
| Account | Debit | Credit |
|---|---|---|
| COGS (or inventory variance) | XX | |
| Inventory | XX |
Table of Contents
Inventory purchases
Inventory is generally recognized when control transfers to you (for example, when goods are received) and you have an obligation to pay.
Freight-in and other costs
Costs that are directly attributable to bringing inventory to its present location and condition are often included in inventory cost (subject to your accounting policy and materiality).
Sales (revenue + COGS)
Most systems post two entries on sale: one for revenue/receivable and one for COGS/inventory.
Write-downs and obsolescence
If inventory is damaged, obsolete, or expected to be sold below cost, you may need to reduce the carrying amount and recognize an expense.
Physical counts and adjustments
Count adjustments reflect shrinkage (loss, theft, spoilage) or system errors. The offset is commonly COGS or an inventory variance account.
Returns to vendor
| Account | Debit | Credit |
|---|---|---|
| Accounts payable (or cash) | XX | |
| Inventory | XX |
Inventory journal entry FAQ
What is the journal entry to purchase inventory?
Debit Inventory and credit Cash (if paid) or Accounts Payable (if bought on credit).
Why do you record COGS separately from revenue?
Revenue measures what you earned from the sale; COGS measures the cost of the inventory sold. Separating them supports gross margin reporting.
Is freight-in part of inventory?
Often yes, when it is directly attributable to acquiring the inventory, subject to your accounting policy and materiality.
How do you record an inventory write-down?
Debit an expense (often COGS or an inventory write-down expense) and credit Inventory (or an allowance account, depending on your system).
How do you record shrinkage?
Commonly debit COGS (or inventory variance) and credit Inventory for the shrinkage amount.
Does inventory affect cash?
Not directly. Inventory is a non-cash asset. Cash is affected when you pay suppliers and when customers pay you.
