How to Track the Random Inventory Adjustments

How to Track the Random Inventory Adjustments

by Megan Schmitke

One of the questions I see asked a lot inside Facebook groups for retailers is “How do you track the inventory that you either keep for yourself or donate?”

After all, it’s not cost of goods SOLD (COGS), since you didn’t sell it, but what are you supposed to do with it?!

There are a couple different ways that you can track and adjust for this, and part of it depends on what your point of sale system will allow you to do.

One option is to make the manual adjustment to the inventory in your point of sale system, and then immediately record that in your bookkeeping records (or letting your bookkeeper know about it). The cost of the item(s) you removed will be credited against your Inventory asset account (lowering your inventory on hand value), and debited to either Owner’s Draws (if you kept it for yourself) or some type of Donated Inventory (if donated) expense account, to record that expense on your P&L.

It is important to note that if you live in a state where your products are taxable, you may need to pay use tax on any items that you have chosen to keep for yourself. If you want to avoid the use tax, I recommend you go with the next option…

Another option is to add a new payment method to your point of sale. You can be as detailed as you want to be here and have multiple options such as “Inventory Kept” and “Donated Inventory”, or just a more general one called “Inventory Adjustments”. If possible, I recommend adding a note to the order to provide more details on what the adjustment was for.

If you choose the 2nd option, you can ring up the items as usual, and then choose this option as the payment method. For items you’re keeping for yourself, you can adjust the price down to cost + sales tax (if the products are taxable), and this allows you to avoid paying use tax on the item AND you can actually deduct the inventory as cost of goods sold (since you “sold” it to yourself).

For items donated, I recommend a similar approach where you ring it up through your point of sale system at cost. This will remove the item from your available inventory, and the payment method selected will flag the order “payment” as the donated amount.

If you have any questions on the best approach to get these types of transactions added to your own bookkeeping records, feel free to send me an email at [email protected], or send me a DM on instagram @findingfreedomfinancial.