What is inventory? How to handle inventory shortages? How to account for inventory discrepancies (4 cases).
What are inventory and inventory control? Why do businesses need to conduct inventory control? How to handle when discovering that actual inventory is less than the accounting books? Let’s find the answers to the above questions with Online Accounting in the article below.
I. Legal basis
- Vietnamese Accounting Standards VAS 02 – Inventories issued under Decision 149/2001/QD-BTC of the Ministry of Finance;
- Circular 200/2014/TT-BTC issued on December 22, 2014;
- Circular 133/2016/TT-BTC issued on August 26, 2016.
II. What is inventory? The meaning of inventory counting
1. What is inventory?
According to Vietnamese accounting standards – VAS 02, the following assets are considered inventories:
- Goods are kept in stock for sale during the normal production and business period;
- Goods in the process of production and unfinished business of the enterprise;
- Raw materials, materials, tools, and instruments used in the production, business, or service provision process.
Inventory includes:
- Goods sent for sale, purchased goods in transit and goods sent for processing;
- Tools and materials;
- Unfinished products;
- Finished products, inventory.
>> Learn more: What is inventory?
2. The meaning of inventory
Inventory counting is the work of counting and making statistics of actual inventory goods (type, quantity, and condition of goods) to compare inventory data on the books of accountants and warehouse keepers.
➨ The meaning of inventory control:
Inventory is often a valuable asset in a business, especially in the commercial and manufacturing sectors. Therefore, periodic inventory counts are important in the production and business processes and corporate governance. Specifically:
- Timely detect differences in goods, surplus or shortage compared to the books, thereby finding the cause and management solutions to avoid loss and confusion;
- Update the status of goods: defective, damaged goods, goods showing signs of quality loss… to have appropriate and timely methods of preservation, transportation, liquidation or replenishment of goods;
- The report more accurately reflects the actual asset value of the enterprise, creating conditions for managers to have a reliable basis to make reasonable business production decisions in the future.
III. Accounting work when discovering inventory shortage compared to the books
Shortage of goods during inventory means that during the inventory process, the actual quantity of goods is found to be less than the number recorded in the books of the accountant and cashier.
➨ The reason for the inventory shortage compared to the books can come from external factors or natural loss of goods. If the shortage is large, it can lead to significant damage to the business. Therefore, when inventory is found to be short of goods, related departments need to find the cause to have a solution to handle and limit future risks.
1. The accountant discovered a shortage of goods on the inventory record, the cause is not yet determined, waiting for processing.
The accountant records the loss in the books on account 1381_Asset shortage awaiting resolution:
Debit account 1381_Defective assets awaiting processing: Value of goods missing compared to the books
Credit account 152, 153, 155, 156: Value of goods missing compared to corresponding books
In case the quantity of goods is missing compared to the books, the cause is immediately determined and there is a handling record within the period, the accountant will record it in the related accounts, not through account 1381.
2. After finding out the cause of the shortage of goods compared to the books
Depending on each case and depending on the management’s decision, the accountant will record the accounting in the books corresponding to the following cases:
➨ Case 1 : Missing goods due to the seller delivering fewer goods than the invoice → request the seller to deliver the remaining missing goods
When the seller delivers additional missing goods, based on the delivery minutes, the accountant records:
Debit account 152, 153, 155, 156: Value of additional goods delivered by the seller
Credit account 1381: Value of additional goods delivered by the seller
When the seller does not have additional goods to deliver, the seller will issue an adjustment invoice to reduce the cost of the previous invoice for the missing goods already issued to deliver to the buyer. Based on the adjustment invoice, the accountant will record:
Debit account 111, 112, 331…: Amount refunded/deducted by seller corresponding to missing goods
Credit account 1381: Value of missing goods excluding VAT
Credit account 1331: VAT amount of missing goods is reduced accordingly
➨ Case 2: Shortage of goods due to loss within the allowable loss range (loss of raw materials within the norm, natural loss), accountants record:
Debit account 632, 642, 641: Standard loss value
Credit account 1381: Standard loss value
➨ Case 3: The loss of goods is attributed to individuals, employees, or organizations → compensation for damages is requested (deducted from salary or compensated in cash), the accountant records:
Debit account 1388: Compensation amount payable
Debit account 1111: Compensation amount paid in cash
Debit account 334: Compensation amount deducted from employee’s salary
Debit account 632: Inventory loss value after deducting compensation amount according to handling decision
Credit account 1381: Total value of missing goods
➨ Case 4: If the cause of the shortage of goods in the warehouse cannot be found, the accountant will rely on the board of directors’ decision to account for the company’s loss.
Debit account 632: The value of missing goods through inventory is included in the enterprise’s loss.
Have account 1381
>> You may be interested in: Internal warehouse accounting service (purchase accounting for businesses).
IV. Frequently asked questions about handling inventory shortages discovered during inventory counts
1. How to limit inventory shortage?
To limit inventory loss during operations, production and business, businesses can apply the following measures:
- Correctly implement the goods management process;
- Periodic inventory;
- Classify inventory into different types according to groups, specific characteristics and manage goods according to specification codes;
- Use inventory management software;
- Design and construct efficient warehouse space, equip machinery and equipment for inventory storage;
- Develop a reasonable method of managing goods for sale, goods in transit, and goods for processing that is suitable for the business.
>> See more: Inventory accounting.
2. If the accountant discovers that the reason for the inventory shortage during the inventory count is due to a mistake and has not been recorded, how should it be handled?
When inventory is found to be missing and the cause is determined to be an error and not recorded, the accountant needs to make additional entries or adjust the data in the accounting books.
3. How often should inventory be taken?
Depending on the characteristics, nature of inventory and type of business of each enterprise, managers need to develop a specific inventory plan throughout the fiscal year.
Enterprises can conduct periodic inventories at the end of each month, quarter, or year, or they can conduct ad hoc inventories (without a specified time limit). The scope of the inventory can be the entire warehouse or a partial inventory of the warehouse.