What happens if my inventory records don't match my physical count?
When your book count and physical count don’t agree, it means something went wrong between the last time the numbers were accurate and now. The discrepancy could be small or significant, but either way it needs to be investigated and corrected. Ignoring it leads to inaccurate financial statements, unreliable cost of goods sold, and potentially wrong tax filings.
The most common causes are data entry mistakes, receiving errors, unrecorded damage or spoilage, theft, and returns that weren’t processed correctly. Sometimes the unit of measure is off. You received a case of 12 items but entered it as 1 unit. Other times a sale was recorded but the inventory quantity wasn’t updated because the system wasn’t configured properly. Before you adjust anything, try to figure out why the numbers are off. The cause tells you whether this is a one-time mistake or a recurring problem in your process.
Once you’ve identified the discrepancy and done your best to find the cause, you need to record an inventory adjustment in your books. In QuickBooks Online, this is done through an inventory quantity adjustment that brings your book count in line with the physical count. The dollar difference flows through to an inventory shrinkage or adjustment expense account, which ultimately affects your cost of goods sold and your profit. If the adjustment is large, it can noticeably change your margins for that period.
Document every adjustment with notes about what you found and why you believe the discrepancy occurred. This matters for your own records, for your accountant at tax time, and in case you’re ever audited. “Adjusted inventory” with no explanation doesn’t help anyone. “Adjusted down 14 units of SKU 2045, likely damaged during July warehouse move” tells a story that makes sense.
The real goal is to reduce how often this happens. Regular cycle counts, where you count a portion of your inventory on a rotating schedule rather than waiting for one big annual count, help catch problems early. Tightening up your receiving process so every delivery gets verified before it’s entered into the system prevents a lot of errors. And making sure your inventory accounting is set up correctly in the first place means the system tracks quantities and values the way it should.
If you’re consistently finding discrepancies every time you do a physical count, that points to a systemic issue rather than the occasional mistake. It could be a workflow gap, a training issue, or a software configuration problem. A QuickBooks ProAdvisor in Long Beach can help you review your setup and processes to find where things are breaking down so you’re not just adjusting the same types of errors over and over again.
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