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ACCA Applied Knowledge · Financial Accounting · Inventories

During a year-end inventory count, a company finds that the physical quantity of an item is lower than the quantity on the inventory records because of theft. What is the correct accounting entry to adjust the records, assuming the loss is to be recognised in profit or loss through cost of sales?

Debit cost of sales and credit inventory. The shortfall means the asset is overstated in the records, so inventory is reduced, and the lost goods are recognised as an expense in profit or loss. The reverse entry would wrongly increase inventory and profit.

  1. ADebit Inventory, credit Cost of sales
  2. BDebit Cost of sales, credit InventoryCorrect
  3. CDebit Payables, credit Inventory
  4. DDebit Inventory, credit Payables

Explanation

Missing inventory reduces the asset, so credit Inventory. The loss is an expense, so debit Cost of sales (or an inventory losses expense). The reverse entry would increase profit for a loss.

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