How to account for stolen inventory

No matter how careful a business owner tries to be or the quality of the business’ security system, a business can still become the victim of theft. Theft of assets must be recorded on the accounting books in order to properly reflect the loss of the asset and the resulting cost of the loss. Any costs resulting from theft, such as door or lock repair, can also be recorded as theft expense.

Reduce the asset account on the balance sheet associated with the theft. For example, if cash was stolen, reduce the balance in the cash account by the amount that was taken. If office equipment was stolen, reduce the office equipment asset account by the total amount paid for the office equipment.

Reduce the accumulated depreciation account by the amount of accumulated depreciation on any depreciable stolen assets. For example, if you paid $500 for a copier that was stolen and you have taken $100 in depreciation expense, then reduce the accumulation depreciation account by $100.

Reduce the owner’s equity account on the balance sheet by the net of the reduction to assets and the reversal of accumulated depreciation. For example, the $500 copier with $100 in accumulated depreciation would result in a reduction to owner’s equity of $400. The entire amount of stolen cash is deducted from owner’s equity.

Create a theft expense account on the income statement.

Record the entire amount of stolen cash as a theft expense and/or the net amount of assets less accumulated depreciation. If you had other expenses associated with the theft, such as door or window repairs and lock rekeying, also record those expenses to the theft expense account.

If you are uncertain how to properly record a loss from theft, consult with an accounting professional in order to properly reflect the loss on your accounting books.

  • Principles of Accounting; A. Douglas Hillman, Richard F. Kochanek and Corine T. Norgaard

Kaye Morris has over four years of technical writing experience as a curriculum design specialist and is a published fiction author. She has over 20 years of real estate development experience and received her Bachelor of Science in accounting from McNeese State University along with minors in programming and English.

How to account for stolen inventory

Businesses that have inventory on hand must account for any inventory gain and loss at the end of an accounting period. Inventory losses are due to such things as theft, obsolete merchandise and broken or damaged goods. Businesses are required to take an on-hand physical inventory count of all merchandise at least once a year and then make an adjustment to inventory based on the loss discovered.

Periodic and Perpetual Methods

Companies with inventory use one of two common methods to account for that inventory: the periodic method or the perpetual method. The periodic method records all inventories into one account, where they remain until a physical inventory count is taken. When this occurs, the inventory account is credited for the difference. The perpetual method is a computerized method that records all inventories when they are purchased, and as they are sold the inventory gets credited out of the account immediately.

FIFO, LIFO and Weighted Methods

Companies use different types of methods to account for the sale of inventory. One is first in, first out, or FIFO, which means the first inventory purchased is the first inventory sold. This removes older items from the balance sheet first, and follows the logic that older items should be used up first to avoid obsolescence.

Last in, first out or LIFO, is another method and the exact opposite of FIFO. This method states the last inventory purchased is the first sold and the older items are reported as inventory. If the prices of inventory are rising, LIFO results in the lower cots of older items being reported as inventory.

Other companies use a method called weighted average, which measures the sale of goods based on their average cost.

Loss Due to Obsolete Merchandise

When a company takes a physical inventory count at the end of a period, it may discover obsolete or out-of-date merchandise. When this happens, the difference in cost needs to be recorded on the books to keep the inventory account as accurate as possible.

If a company has 100 items recorded on the books for $10 each, but it figures the items are really worth only $6 each, an adjusting entry needs to be made. In this case, an inventory loss journal entry of $400 would be debited to the Cost of Goods Sold account and $400 would be credited to the Inventory account. This reduces the cost of inventory shown in the bookkeeping records.

Inventory Loss Due to Damage

Often, a company accepts returns that are damaged goods. These goods are sometimes returned to the manufacturer, but not always. If they are not returned to the manufacturer, the company must write off the damaged goods so they are not part of the inventory count. To do this, the damaged stock entry would be a debit to Cost of Goods Sold and a credit to Inventory.

Inventory Loss Due to Theft

No matter how good a company’s internal controls are, theft may sometimes occur. The difference between what the inventory is supposed to be and what it is calculated at is usually because of theft by employees and customers. The inventory account needs to be adjusted because of this. When theft is discovered during a physical inventory count, the business must debit the Cost of Goods Sold account and credit the Inventory account.

  • Accounting Coach: How Do You Report a Write-Down in Inventory?
  • Patriot Software: What Is Inventory Shrinkage?
  • Investopedia: Inventory Write-Off
  • FASB. “Statement of Financial Accounting Concepts No. 6,” Page 2. Accessed Sept. 9, 2020.
  • FASB. “Accounting Standards Codification: 330 Inventory; 10 Overall; S99 SEC Materials.” Accessed Sept. 9, 2020.

Jennifer VanBaren started her professional online writing career in 2010. She taught college-level accounting, math and business classes for five years. Her writing highlights include publishing articles about music, business, gardening and home organization. She holds a Bachelor of Science in accounting and finance from St. Joseph's College in Rensselaer, Ind.

How to account for stolen inventory

If you suffer a theft in the course of your business or trade, you may be entitled to a tax deduction equal to your loss. The theft can be anything from embezzlement to robbery, as long the action is illegal and you report it as a crime. The lost property can be money, equipment, supplies or even items owned by an employee for use on the job.

Types of Thefts Covered

The Internal Revenue Service defines theft as any crime involving “the taking and removing of money or property with the intent to deprive the owner of it.” The definition covers burglary, robbery, embezzlement, extortion and even blackmail. The taking of money through fraud or misrepresentation also counts as theft if the action violates state or local law. Filing a police report helps you document the theft in the event the IRS asks you to substantiate your deduction.

Calculating Loss (or Gain)

The amount of loss you can deduct on your tax return is usually equal to the fair market value of all the stolen property, minus any reimbursement you can claim from insurance coverage. If you claimed depreciation on any of the property in previous years, you can only count your adjusted basis in the property as its value. If your insurance pays you more than your adjusted basis, you have to pay income taxes on the gain unless you use the money to replace the stolen property within two years.

Forms to Use

You must calculate your total business theft losses using Form 4684, “Casualties and Thefts.” If you are a business owner, you must report the total from Form 4684 on Line 14 of your Form 1040 as “Other gains (or losses).” If you are an employee and the stolen property was required for your job, you must report the total on Form 4684 on Line 28 of Schedule A as “Other miscellaneous deductions.” You can only deduct the total as an employee if you itemize deductions.

Special Rules for Inventory

If the theft results in a loss of your inventory, such as items you hold for sale, you do not have to use Form 4684. You have the option of deducting the theft by increasing the cost of goods sold when you complete your Schedule C. Simply deduct the value of the stolen items from your closing inventory. This increases your total business expenses, resulting in the same deduction. If you take this route, you cannot take a deduction for those same items on Form 4684.

No one wants to think about lost warehouse inventory, and it can be organizationally frustrating to determine the best process to find, research, and rectify inventory discrepancies. One of the primary reasons a company implements a warehouse management system (WMS) is to know the exact location of their inventory; if the inventory is not there, one might think it is easy to just write that inventory off the books. But the reality is rarely that simple. Accountants do not like big swings on the record books, and those swings have even larger implications to public companies.
Warehouse managers, on the other hand, have their own job to do: fulfill orders cost-effectively. Discrepancies between the physical and systemic inventory levels can make that job tremendously more difficult. Your organization can avoid this problem by following a few steps when it comes to lost warehouse inventory.

Determine the Rules Based on Your Business Need

In today’s world, very few companies are forced to perform annual physical counts. This is because most companies follow a strict set of rules that were established (usually by accounting auditors) to ensure adequate inventory accuracy. These rules often use inventory velocity to prescribe a frequency with which items must be counted. It is critical for warehouse managers to know the rules so that their system can be configured accordingly.

Automate Inventory Control to Reduce Errors

Automating inventory control processes is the simplest way to control inventory and reduce lost warehouse inventory. Processes that are frequently automated include: creating cycle count tasks based on a time interval, creating cycle count tasks based on triggers (like shorting a pick), creating a follow-up counting task when a quantity or value threshold has been exceeded, and automatically booking certain acceptable variances. Automation of these processes provide users the ability to act expeditiously and move on to other value-added tasks, rather than seeking out approval to act.

Book Inventory Changes Immediately

If possible, variances below an acceptable threshold should be “booked” in the WMS immediately; which means that the variance is communicated to the financial system. These rules may differ depending on the quantity and value of the variance, which is different for every business. When delaying the booking until research can be completed, there is often a negative impact to the operation. Systems do not respond well to poor data, and postponing the booking of variances is like intentionally feeding your WMS bad data. For example, when a forward pick location has less physical than systemic inventory, the WMS may not trigger a replenishment that is required to fulfill orders, resulting in shorted picks. On the flip-side, if a location is found to have more physical inventory than systemic inventory, the next replenishment task could cause the location to exceed its capacity, spilling inventory into nearby locations or onto the floor, causing safety and accuracy concerns.

Stop Hiding Inventory Pricing From Employees

Item pricing information may not be necessary for most WMS functions, but it is often very helpful when it comes to inventory control. Many companies keep all pricing information outside of the WMS in order to reduce theft or exposing what may be perceived as competitive pricing information. Rather than storing item cost (which may be competitive information) many companies store the suggested retail price at the item level and use that information to help drive inventory control processes. When possible, make this information accessible to decision makers, like floor or shift managers.

Integrate Systems With Business Intelligence to Compare Database Information

If the pricing information you require is not available in the WMS for any reason, another option is to integrate your reporting with information from other systems to complete the write-off process. While this is better than not having price information at all, it will have the effect of reducing your level of process automation.

Set Realistic Inventory Thresholds

Inventory thresholds include an allowed variance amount for inventory discrepancies; common examples include a percentage of units, quantity of units, and dollar amount. Creating realistic inventory thresholds will provide an objective view of inventory accuracy and aid in the write-off process. Compare what your WMS will support with what has been approved by your auditors. Before modifying your WMS to support the requirements, be sure to explain to the auditors what can be done to see if it is acceptable; it often is.

Use These Best Practices to Reduce Lost Warehouse Inventory

Thinking about lost warehouse inventory and taking steps to determine what to do when an item, case, or pallet of product goes missing will lessen the stress and workload. If you are uncertain about connecting databases together and using other tactics to develop an effective strategy for managing lost warehouse inventory, Veridian can help. Speak with a Veridian representative by calling 1 (770) 225-1750, or fill out the online contact form today.

In a perfect world, there would be no need to worry about the possibility of inventory being stolen. Sadly, many businesses lose a pretty big chunk of change every year due to theft. It can be tough to know if inventory “shrink” is because of waste, breakage or theft. The first thing you should do is make sure your staff are required to record all waste (like offcuts, residuals etc.) and breakage (items that are literally broken in production, assembly or handling) to a supervisor. The supervisor should keep track of waste and breakage on a daily basis and deduct it from inventory either daily or weekly. This can also help the supervisor with remedial training or process improvements if there are patterns with certain staff or certain processes.

After you have identified waste and breakage, the rest of the shrink is likely due to theft. If you’re losing money because a measurable portion of your inventory is being stolen, there are a few inventory management techniques you can employ. Remember – depending on your business, inventory can disappear either through customer or employee misdeeds……Here are five techniques to help you reduce loss of inventory by theft:

1. If you have a physical store, your inventory management efforts will need to include efforts to prevent shoplifting. If you notice that shoplifting is a problem, you may want to install security cameras and educate your employees about loss prevention and in-store inventory control. Even if you don’t have a physical store – you might want to use tracking methods such as cameras and time-clocks so that you know which employees are around the inventory at all times.

2. Make sure your employees know that you are carefully keeping track of your inventory with highly efficient inventory management techniques. Employee theft is far less likely if inventory systems are well-run and organized.

3. Only allow trained and trusted employees to edit data in your inventory management software. It’s easy to change a few numbers in the inventory software so no one realizes products are gone. Many software systems require a unique logon and therefore updates to inventory can be tracked by user. Make sure employees do not share user ID or passwords. This will give you an ability to audit changes made to inventory numbers if you ever identify a problem.

4. On a related note, it’s a good idea to password protect your inventory tracking software and any other business software you use. You can then choose to only give the password to employees who deal directly with your inventory management or supply chain management. Again – make the user ID and password unique to each individual that has access.

How to account for stolen inventory5. Store your inventory in a secure place. This may seem obvious, but where inventory is stored is sometimes overlooked. You should try to set up some kind of protocol with your employees to ensure that doors are always locked and alarms are always set. Only allow certain employees (either line supervisors or managers) to have access to the most expensive inventory items. That way – they are accountable for those items. You can often utilize a “cage” within your warehouse for really important stuff or use locked cabinets in your retail store like you see in jewelry shops (and only give managers the keys!). Small steps like this can save you a fortune in the long run.

If you are using the right inventory management techniques, there’s no need to worry about inventory theft. Just arm yourself with a highly organized inventory management system!

A couple of months ago, my steam account go hacked and my items were stolen. I managed to get my account back via verfy through payment. Whille my steam account was hacked, the hacker stole my TF2 items, which approximately were valued at 200$ spent on them. I managed to get the hacker trade banned through Steam Support. When I asked Steam Support for my items back, they denied me. I even wrote to Valve in an email about my items or a compensation of my money back. For those who think that I’m trying to scam and get free items or money, I can prove that I was hacked with a link to the hacker’s now trade-banned profile, his email and inventory history that verifies that he took what I said that he did. I feel really ripped off by Valve, who aren’t willing to even compensate for my loss or try to resolve the problem. What should I do?

Nothing but to take care of your steam account next time.

Scammed or stolen items are not returned.

Valve is not at fault for anyone falling for a scam or misbehaving with their account security and their item restoration policy is clear enough.

you will not get your items back, regardless of what you provide as information or that you are friends with the president of the poodle club.

Nothing but to take care of your steam account next time.

Scammed or stolen items are not returned.

Nothing but to take care of your steam account next time.

Scammed or stolen items are not returned.

Its not really my fault that I got hacked. How would I have prevented getting hacked? I had my firewall up and all my anti hack programs but still got hacked. That seems really unfair that scammed or stolen items aren’t returned. Valve got my 200$ and they are happy. and now I have basically two cents of the 200. Seems Fair
And you see there is a lot of ways to get your steam account "hijacked" either by the users ignorance for visiting phising site that using a fake steam login form, downloading and executing malware or using a compromised device.

The security on steam is bulletproof as long as the user is not being ignorant.

To account for the loss, you record the dollar amount of the damage and reduce or write-off the asset. For example, if $9,000 of inventory is damaged in a fire, record the loss as a $9,000 debit to Fire Loss, and a $9,000 credit to Inventory.

  1. Go to the Lists menu and select the Item List.
  2. On the Activities tab, click the drop-down arrow and select Adjust Quantity/Value on Hand.
  3. Select the Adjustment Account by clicking the drop-down arrow.
  4. Select the item used and record the New Quantity and Qty Difference.
  5. Once done, click Save & Close.

Secondly, how do you record a write off inventory?

Accounting for Inventory WriteOff Using the direct writeoff method, a business will record a journal entry with a credit to the inventory asset account and a debit to an expense account. For example, say a company with $100,000 worth of inventory decides to writeoff $10,000 in inventory at the end of the year.

How do you account for unsold inventory?

In the periodic inventory system, use the total inventory expense for the period as listed in your purchase account. For example, if you added $5,000 to your inventory, you would add $5,000 to $10,000 to get $15,000 in inventory. Subtract the value of goods sold from the total inventory to get the leftover inventory.

Inventory is one of the biggest assets on a manufacturer’s balance sheet. It’s also one of the hardest assets to measure and track.

Thousands of transactions flow through the inventory account each year — and many of these journal entries require subjective estimates, such as overhead allocations, write-offs, and valuation adjustments. In addition, many employees have direct daily access to inventory or inventory accounting records, providing an ongoing temptation to steal or cook the books.

Inventory Fraud Example

Consider ABC Manufacturing, a fictitious company that fell victim to a $300,000 inventory fraud scheme involving three trusted employees. Their scam was simple: The shipping clerk sent most finished goods to legitimate customers or company-owned retail outlets. But a few shipments to retail outlets were redirected to the home of the payables clerk. Later, the controller picked up the stolen goods to resell them on the Internet.

ABC’s retail outlets weren’t invoiced for shipments at the time of delivery. So there was no paper trail identifying what had happened to the redirected shipments. Without physical inventory counts, the perps were able to pull the wool over the owner’s eyes for more than 18 months. Eventually, the shipping clerk became overwhelmed with guilt and confessed the scheme to the owner. With stronger internal controls, the scheme might have been detected sooner — or prevented from ever occurring.

What Makes Inventory Vulnerable to Fraud?

Inventory is vulnerable to fraud because it’s eventually closed out to cost of goods sold (COGS). This is an expense account that winds up as part of retained earnings at the end of the accounting period. The formulas for computing COGS are:

Beginning inventory + purchases = goods available for sale

Goods available for sale – ending inventory = COGS

These formulas make sense for retailers or distributors that don’t add value to the goods they ship and, therefore, handle only finished goods. But they’re oversimplified for manufacturers that process raw materials into finished goods.

Manufacturers typically possess three types of inventories:

  • finished goods
  • work-in-progress (WIP)
  • raw materials

WIP inventories include charges for raw materials, direct labor, and overhead. Sometimes there are additional charges when the production of components is outsourced to a third party or another division of the company.

In addition, manufacturers can use a variety of techniques to account for finished goods inventories under Generally Accepted Accounting Principles. These include the lower of cost or market; first-in, first-out (FIFO); and last-in, first-out (LIFO).

The more complicated a company’s inventory reporting process, the more opportunities employees have to commit fraud.

Employee Motives and Methods for Inventory Fraud

Small manufacturers often operate like families. Owners can’t fathom that a trusted “family member” would ever steal inventory. But it happens more often than you might think. When faced with financial pressure and given an opportunity to steal, an employee may rationalize the theft of inventory.

For example, personal financial pressures or addiction may entice an employee to steal inventory or overstate it — especially if he or she discovers a weakness in the internal accounting policies and procedures. The employee may rationalize the theft because he or she feels underpaid, underappreciated or overworked by an owner who takes frequent vacations.

Whatever their motives, employees use a variety of techniques to steal inventory. The most obvious is directly taking items for personal use or resale. Physical controls are the best prevention tools here. To illustrate, warehouses should have a limited number of doors with 24-hour surveillance inside and outside of the facilities, including dumpsters, trucks, foliage and parking lots.

Inventory fraud may also occur within the accounting department. For example, the controller or CFO may try to overstate inventory by artificially inflating inventory counts or values, recording false entries into the general ledger, or failing to write off old, obsolete or damaged items.

Moreover, the inventory account may become a “slush fund” for other internal fraud schemes. Inventory overstatements might be used to manage earnings or to meet financial covenants.

How to Prevent Inventory Fraud

Unearthing financial misstatements involving inventory overstatements is less straightforward than catching people who directly steal physical assets. A forensic accountant can help you by benchmarking financial statement trends, verifying source documents and building a case that will help you prosecute fraudsters in your midst.

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In our example on inventory write downs, an allowance for obsolete inventory account is created when the value of inventory has to be reduced due to obsolescence. It is maintained as a contra asset account, so that the original cost of the inventory can be held on the Inventory account until disposed of.

In some cases, inventory may become obsolete, spoil, become damaged, or be stolen or lost. When these situations occur, a company must write the inventory off. An inventory write-off is an accounting term for the formal recognition of a portion of a company’s inventory that no longer has value.

As a small business owner, you may know the definition of cost of goods sold (COGS). But do you know how to record a cost of goods sold journal entry in your books? Learn more about COGS accounting, including the steps on how to record COGS journal entries, below.

Double Entry Bookkeeping

Inventory refers to the goods and materials in a company’s possession that are ready to be sold. It is one of the most important assets of a business operation, as it accounts for a huge percentage of a sales company’s revenues.

Obsolete Inventory

How to account for stolen inventory

Obsolete inventory is inventory that a company still has on hand after it should have been sold. When inventory can’t be sold in the markets, it declines significantly in value and could be deemed useless to the company.

What is inventory obsolescence allowance?

allowance to reduce inventory to net realizable value definition. This is a valuation account for the asset Inventory. A credit balance should be reported in this account for the amount that the net realizable value of inventory is less than the cost reported in the Inventory account.

It may be expensed directly to the cost of goods sold or it may offset the inventory asset account in a contra asset account, commonly referred to as the allowance for obsolete inventory or inventory reserve. Examples of expense accounts include cost of goods sold, inventory obsolescence accounts, and loss on inventory write-down. A contra asset account may include allowance for obsolete inventory and obsolete inventory reserve.

When the inventory write-down is small, companies typically charge the cost of goods sold account. However, when the write-down is large, it is better to charge the expense to an alternate account. The debit to the income statement reduces the net income which in turn reduces the retained earnings and therefore the owners equity in the business. The following Cost of Goods Sold journal entries provides an outline of the most common COGS.

Popular Double Entry Bookkeeping Examples

How to account for stolen inventory

  • The allowance method may be more appropriate when inventory can reasonably be estimated to have lost value, but the inventory has not yet been disposed.
  • When the asset is actually disposed, the inventory account will be credited and the inventory reserve account will be debited to reduce both.
  • Using the allowance method, a business will record a journal entry with a credit to a contra asset account, such as inventory reserve or the allowance for obsolete inventory.

The allowance method may be more appropriate when inventory can reasonably be estimated to have lost value, but the inventory has not yet been disposed. Using the allowance method, a business will record a journal entry with a credit to a contra asset account, such as inventory reserve or the allowance for obsolete inventory. When the asset is actually disposed, the inventory account will be credited and the inventory reserve account will be debited to reduce both. This is useful in preserving the historical cost in the original inventory account.

Generally accepted accounting principles in the U.S. allow businesses to use one of several inventory accounting methods. FIFO (first-in, first-out), LIFO (last-in, first-out) and average cost are the three most commonly used inventory systems. When inventory costs are not uniform due to price fluctuations, the choice of inventory method can result to an increase or decrease in cost of goods sold.

Balance Sheet

To increase the value of your inventory, you debit it, and to reduce its value, you credit it. An inventory reserve is also a balance sheet account, but since it is a contra asset account, or one that reduces asset value, you credit it to increase it and debit it to reduce it. When you sell items, you credit inventory and debit a cost of goods sold expense account.

To recognize the fall in value, obsolete inventory must be written down or written off in the financial statements in accordance withGenerally Accepted Accounting Principles (GAAP). A write-down occurs if the market value of the inventory falls below the cost reported on the financial statements. A write-off involves completely taking the inventory off the books when it is identified to have no value and, thus, cannot be sold. Inventory is an asset, and as such, it is a balance sheet account.

How to account for stolen inventory

When you establish an inventory reserve, you have already charged your expense account. Therefore, as long as your inventory reserve is sufficient, your entry would be a credit to the specific inventory account and a debit to the inventory reserve account to reduce the balances in each account.

Generally Accepted Accounting Principles (GAAP) require that any item that represents a future economic value to a company be defined as an asset. Since inventory meets the requirements of an asset, it is reported at cost on a company’s balance sheet under the section for current assets.

Recording Obsolete Inventory

If the reserve balance is insufficient, you would credit inventory for the full adjustment, debit inventory reserve for its full balance and debit cost of goods sold for the difference. Inventory items at any of the three production stages can change in value.

Inventory is goods that are ready for sale and is shown as Assets in the Balance Sheet. When that inventory is sold, it becomes an Expense and we call that expense as Cost of goods sold. Inventory is the cost of goods which we have purchased for resale, once this inventory is sold it becomes the cost of goods sold and the Cost of goods sold is an Expense.

When Should a Company Use Last in, First Out (LIFO)?

If the inventory is held for too long, the goods may reach the end of their product life and become obsolete. Inventory refers to assets owned by a business to be sold for revenue or converted into goods to be sold for revenue.