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From time to time in most businesses, it is necessary to reduce inventory and account for it as a business expense, such as for store use in promotional events, or as compensation in trade for services you get for your business. Shrinkage can also be an issue, and we will explore below how you can account for resulting inaccuracies in your inventory.

What this will do for you is successfully adjust the inventory quantities as needed, give you a place to look up usage for whatever periods you need, document what happened for your accountant or bookkeeper, and do all of this without adversely affecting your reporting.

Most of your work in adjusting inventory quantities will be covering for shrinkage, store use and promotional items, and you'll do it in the Register, as explained below. But for manual inventory adjustments, you may need to do them either by spreadsheet (by going to Inventory > Bulk > Edit Existing Inventory > Download) or directly within the product data card itself (by going to Inventory > Products > Search for the Product > Change Inventory).

 

Please Note: If you are using the old Rain POS system, the above two paths in the system start in the Products menu: Products > Bulk > Edit Existing Inventory > Download, and for direct product editing within a single product, Products > Products > Search for the Product > Change Inventory.

 

Adjusting for Inventory Shrinkage

Shrinkage occurs when your actual inventory on hand is less than the quantity the system has recorded for you. This can occur for a variety of reasons:

• Customer or employee theft.
• Unrecorded store use.
• Inaccurate records of sales (e.g. a similar product being mistakenly sold as the product in question).
• Inventory loss due to unrecorded damage / product age / expiration.
• Employee negligence and/or waste.

Why should I care about properly accounting for shrinkage?

It would seem more simple to just adjust the inventory numbers and move on, but doing so will create a quantity discrepancy that could come out if you get audited. Also, it's very important to have accurate inventory records so you know the actual value of your inventory on hand (falling short could make you liable for insufficient tax payments and overshooting would mean you're paying too much in taxes).

Here is exactly why overstating inventory is very bad for your business. (Source - AccountingCoach.com)

Equally as important, if you follow the steps below, you will know why you had less inventory than you thought, and you would be able to provide that information if asked by your tax authority.

 

Steps On How to Adjust for Shrinkage

The information you will need on Shrinkage will include the items that were short on inventory, the quantities that were short, the costs for each, and the time the shortage was noted. While we don't have a dedicated report with this information, we do have an excellent way for you to keep track of shrinkage on an ongoing basis:

1. Go to the + Button at the top of the screen and click to create a new Customer named Inventory Shrinkage. It's a good idea to add your main email address to give you an email backup of all Shrinkage information you enter this way.
   
    
2. In the Settings tab, give the Customer a 100% Discount.   
                                        
3. Whenever you find an item that is short on inventory, go to the Register and search for your Inventory Shrinkage Customer.
4. Add the item(s) with the shrinkage, and add a quantity equal to the quantity that is unaccounted for. For example, if the system thinks you have 4 of an item, but you count only 1, set the quantity missing of 3 in the Register line-item for shrinkage. After the transaction is complete, your inventory will be at 1, and the 3 missing items will be in the sales history of the Shrinkage customer. 
5. Click the Notes button and in the Public Notes area for the transaction, fully note the reasons for the shrinkage, when and how it was discovered. Also, if you wish to provide the best possible detail to your accountant, be sure to note the cost per unit you paid, and the total cost to you of the loss. These notes will print on the finished receipt and will also stay with the transaction, popping up automatically whenever you view it in the future.
6. Complete the transaction, and it's a good idea to email yourself a copy of the receipt as a backup record of the Shrinkage. Also, keep the printed receipt in a folder with other Shrinkage notes for your accountant.
   
   
   
   
7. You will also want to keep a running total of the discounts in these transactions so you can deduct that total from your legitimate promotional discount total for each accounting period.
8. You can always look up any of this information by going to Customers and viewing the History tab of your Inventory Shrinkage customer.
9. To see totals, open the Transaction Detail report and set the date range to the period you want to see, then search for the Shrinkage customer.
10. The Total Discounted Amount represents revenue loss due to shrinkage, and can now be fully accounted for. The Total Cost of the inventory lost represents money you lost directly due to shrinkage, and your accountant can use these numbers for your tax reporting.

 

Adjusting Inventory for Store Use

From time to time, you may need to use some of your inventory for the internal use of the store, in some way. Or you may use store inventory in trade for services rendered, or for promotional prizes or giveaways. Whatever the case, when you use inventory in this way, it is important for you to properly account for that usage in the system so your reporting comes out accurately. You can repeat the steps listed above, and just create a different customer based on what is happening, for example, a Store Use customer and a Store Promotion customer could account for inventory uses for those areas.

 

Manually Adjusting Inventory

For situations when you discover an item that shows less inventory in the system than you actually have on hand and you don't feel the need to log the inventory as shrinkage, you can do your adjustment in one of four ways:

1. If you are working with a lot of products (e.g. taking an inventory count of your floor), you can use the Batch Inventory tool to update the quantities and even the costs if you need. Click here to learn how to work with the Batch Inventory tool: Batch Inventory.
2. A second way to update products in bulk is to use the Edit Existing Inventory spreadsheet. This can be downloaded by department, category, or vendor, if you like, and can update the inventory count and the item cost as needed. You can download this spreadsheet by going to Inventory > Bulk > Edit Existing Inventory. Click here to learn more about working with spreadsheets: Spreadsheets.
3. If you just have a few products to work with, the fastest and easiest way by far to update inventory count is to go to Inventory > Products , search for the product, and manually edit the inventory. You can do this by clicking the Change link for Inventory just above Price when you are in the Edit Product view. You can click the Change Inventory tab in the panel that opens and manually adjust Quantities, Costs, Extra Cost per item (shipping cost) and the Received Date, as needed. In the image below, the first number for Quantity represents the amount currently on-hand, and the second number represents the original amount added on the date in question.