Financial Accounting · Inventories

Inventory Adjustments and Accounting Entries in Financial Accounting

Updated 11 October 2026 · Fact-checked

Inventory adjustments correct the closing inventory figure so it shows the right cost or net realisable value at the year end. Calculate cost of sales as opening inventory + purchases − closing inventory. Adjust a count-date figure for movements to year end, write down items to NRV, and exclude goods sold on sale or return.

Understand Inventory Adjustments and Accounting Entries

Closing inventory is the goods you still hold at the year end. It appears twice. It is a current asset in the statement of financial position. It is also deducted in cost of sales, so only the cost of goods sold is matched with sales revenue.

If closing inventory is too high, cost of sales is too low and profit is too high. If it is too low, profit is too low. The error reverses next year, because this year's closing inventory is next year's opening inventory. Total profit over two years is then correct, but each year is wrong.

In the exam, the count rarely happens on the year-end date. You must start from the counted value and adjust for movements between the count date and the year end. Sales are removed at cost, not selling price. Purchases received after the count date but before the year end are added at cost.

Under IAS 2, inventory is valued at the lower of cost and net realisable value (NRV), item by item where practical. NRV is the estimated selling price less costs to complete and costs necessary to make the sale. If NRV is below cost, you write the item down to NRV. If NRV is above cost, you leave it at cost. You never write inventory up above cost.

Goods sent to a customer on sale or return remain the seller's inventory until the customer accepts them, or the agreed time limit passes. If they were recorded as a sale, reverse the sale and include the goods in inventory at cost (lower of cost and NRV).

Key formulas to remember

Cost of sales: Cost of sales = Opening inventory + Purchases (net of returns, plus carriage inwards) − Closing inventory; Carriage inwards and import duties are part of cost of purchases. Carriage outwards is a distribution expense, not cost of sales.
Gross profit: Gross profit = Revenue − Cost of sales; An error in closing inventory changes gross profit and net profit by the same amount.
IAS 2 measurement: Inventory = lower of cost and NRV; Apply to each item or group of similar items, not to the total in aggregate unless items are similar.
Net realisable value: NRV = Estimated selling price − Costs to complete − Selling costs; Use the cost to complete only if the goods are unfinished.
Count date roll-forward: Year-end inventory = Count-date inventory + Purchases (at cost) after count − Sales after count (at cost); If the count is before year end. If the count is after year end, reverse: subtract later purchases and add back later sales at cost.
Cost from selling price: Cost = Selling price × 100 ÷ (100 + mark-up %) or Selling price × (100 − margin %) ÷ 100; Use mark-up if profit is stated as a percentage of cost. Use margin if it is a percentage of selling price.
Write-down entry: Dr Cost of sales; Cr Inventory (with the write-down amount); In practice this is done by reducing the closing inventory figure to the lower value.

How to solve Inventory Adjustments and Accounting Entries questions

Use this order for any inventory adjustment question. It keeps the arithmetic and the effect on profit clear.

1Write down the starting inventory figure and note its date: the count date or the year end.
2Adjust for the date difference. Add purchases and remove sales at cost after a count before year end. Reverse this for a count after year end.
3Check each item for NRV. Compare cost with NRV and take the lower. Only write down, never up.
4Deal with special items: add goods on sale or return back at cost, and exclude goods held for others (such as consignment inventory held for another party).
5Total the corrected closing inventory. Compare it with the figure originally used.
6Work out the change in profit: the difference in closing inventory is the same difference in profit. Update cost of sales as opening + purchases − closing.
7Update the statement of financial position: inventory is the corrected figure. Check that the answer type (number entry, multiple choice) matches what you calculated.

Quickest way: Adjust the inventory figure and carry the difference to profit

When to use it: Use this for objective test questions asking for the corrected inventory value or the effect on profit.

Write the original inventory figure.
List each adjustment with a plus or minus sign: plus for stock you own but excluded, minus for stock you do not own or have over-valued.
Add up to get the corrected figure.
The profit effect equals the net adjustment: an increase in inventory increases profit, a decrease reduces it.
Convert sales to cost before adjusting. Use mark-up or margin carefully.

Common mistakes in Inventory Adjustments and Accounting Entries

Adjusting for sales after the count date at selling price
The invoice shows the selling price, so students use it directly.
Fix: Convert to cost first. Cost = selling price × 100 ÷ (100 + mark-up %), or selling price less the margin.
Adding purchases after the count date when the count was after the year end
Students memorise one direction and apply it every time.
Fix: Draw a timeline. If the count is after year end, remove later purchases and add back later sales at cost.
Writing inventory up to NRV when NRV is higher than cost
Students assume NRV is always the correct value.
Fix: Take the lower of cost and NRV. If NRV is higher, keep cost.
Ignoring costs to sell when calculating NRV
Students stop at the expected selling price.
Fix: Deduct selling costs, and costs to complete if the goods are unfinished.
Treating sale or return goods as sold
The goods have left the premises and an invoice was raised.
Fix: If the customer has not accepted them and the return period is open, reverse the sale and include the goods in inventory at cost or NRV if lower.
Reversing the effect on profit
Students forget that closing inventory is deducted in cost of sales.
Fix: Higher closing inventory means lower cost of sales and higher profit. Check by this rule.

Worked examples

Example 1

A company's year end is 31 December. Inventory was counted on 5 January and valued at $84,000 at cost. Between 1 and 5 January, goods costing $6,500 were received and recorded as purchases in January. Goods that were sold in the same period for $9,000 were sold at a mark-up of 25% on cost. Neither movement is in the year-end figures. What is inventory at 31 December?

Show the solution

The count is after year end, so reverse the movements from 1 to 5 January.
Purchases received in January were counted, but were not owned at 31 December. Subtract $6,500.
Sales in January removed goods from inventory before the count. They were owned at 31 December. Add back their cost.
Cost of the goods sold = 9,000 × 100 ÷ 125 = $7,200.
Inventory at 31 December = 84,000 − 6,500 + 7,200 = $84,700.

Answer: $84,700

Example 2

At 30 June, a business has inventory at cost of $52,000 in its records. This includes 400 units costing $30 each. Their expected selling price is $28 each, and selling costs will be $4 per unit. In addition, goods that cost $3,600 were sent to a customer on sale or return and recorded as a sale of $5,400. The customer had not accepted them by 30 June, and the return period had not expired. Calculate the corrected inventory and the effect on profit.

Show the solution

NRV per unit = 28 − 4 = $24. This is below cost of $30, so write down by $6 per unit.
Write-down = 400 × 6 = $2,400.
The sale or return goods are still the business's inventory. Add them at cost of $3,600, since cost is below the selling price.
Corrected inventory = 52,000 − 2,400 + 3,600 = $53,200.
Check for the sale in revenue: reverse the $5,400 sale and reduce receivables by $5,400.
Profit effect: revenue falls by 5,400. Cost of sales falls by 3,600 (inventory goes up) and rises by 2,400 (write-down) so net cost of sales falls by 1,200.
Net profit change = −5,400 + 1,200 = −$4,200.

Answer: Corrected inventory is $53,200 and profit falls by $4,200.

Exam tips

Read when the count took place before touching a number. Mark it on a quick timeline.
Check whether a percentage is mark-up or margin before converting sales to cost.
For multiple response questions, test each statement against the rule: lower of cost and NRV, no write-up, sale or return stays in inventory.
In number entry questions, give the figure asked for: corrected inventory or the change in profit, not both.
If an inventory error is found in the opening figure, remember it flows into cost of sales and profit in the opposite direction to a closing error.

Practice questions from Inventories

Inventory Adjustments and Accounting Entries in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsInventory Adjustments, Year-end Counts and Disclosures

Inventory Adjustments and Accounting Entries: frequently asked questions

How do I adjust the inventory count date to the year end?

Start from the counted value. If the count was before year end, add purchases and subtract sales at cost after the count. If it was after year end, do the reverse. Always use cost, not selling price.

What is the journal entry for an inventory write-down?

Debit cost of sales and credit inventory with the amount by which cost exceeds NRV. In a year-end exam, you usually just reduce the closing inventory figure to the lower value.

How do inventory errors affect profit?

If closing inventory is overstated, cost of sales is understated and profit is overstated by the same amount. The error reverses next year because it becomes opening inventory. Understatement has the opposite effect.

Are goods on sale or return included in inventory?

Yes, if the customer has not yet accepted them and the return period is still open. The seller keeps them in inventory at the lower of cost and NRV and reverses any sale recorded.