Inventory Count Adjustment Journal Entry: IFRS Guide

What Is an Inventory Count Adjustment Journal Entry?

An inventory count adjustment journal entry is the entry that makes the [general ledger](/glossary#general-ledger) agree with what the warehouse actually counted. If the stock records say the business owns SAR 180,000 of inventory, but the approved physical count supports SAR 172,400, the accounting records cannot stay at SAR 180,000. The difference has to be investigated, approved, and posted.

This topic sits between warehouse operations and financial reporting. The warehouse team counts units. The inventory system applies the approved cost method. Finance decides whether the difference is normal shrinkage, an error, a missing receipt, damage, theft, or a net realisable value issue. Only then should the accountant post the [journal entry](/glossary#journal-entry).

Under [IFRS](/glossary#ifrs), the inventory balance is not just a warehouse number. [IAS 2 Inventories](https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/) requires inventory to be measured at the lower of cost and net realisable value, and it requires losses and write-downs to be recognised as expenses in the period they occur. That means a count shortage normally reduces inventory and increases an expense such as cost of goods sold, inventory shrinkage, or inventory loss.

The entry is usually simple. The hard part is proving the reason for the adjustment. If you post every count variance to cost of goods sold without investigating, the books may balance, but the business learns nothing about receiving errors, theft, expiry, system mistakes, or cut-off problems.

When Should You Adjust Inventory After a Physical Count?

Do not post the first number that appears on the count sheet. A physical count should move through a short control path before it reaches accounting: first count, recount large differences, investigate unusual items, cost the final approved quantities, then post the entry. This keeps the accounting entry from becoming a shortcut around weak controls.

A useful month-end routine is:

• Freeze inventory movements or clearly mark cut-off documents.
• Count physical quantities by SKU, location, and condition.
• Compare counted quantities with the perpetual inventory listing.
• Recount high-value, negative, or unusual variances.
• Separate shortages, overages, damage, expiry, and cut-off errors.
• Apply the approved cost formula from the [inventory valuation methods IFRS](/learn/inventory-valuation-methods-ifrs) policy.
• Approve the final adjustment before posting.

The timing matters because inventory affects both the [balance sheet](/glossary#balance-sheet) and the [income statement](/glossary#income-statement). If the count belongs to 30 June, but the adjustment is posted into July, June inventory may be overstated and July profit may be understated. That is why inventory counts usually connect to the [month-end close checklist](/learn/month-end-close-checklist).

For a Saudi trading company, cut-off is often where mistakes hide. Goods may arrive at a Riyadh warehouse before the supplier invoice is entered. Customer shipments may leave the warehouse before the sales invoice is posted. A shortage is not always a loss. Sometimes it is a receiving, shipping, or documentation timing issue that needs a different entry.

Which Inventory Count Adjustment Journal Entry Should You Post?

The account choice depends on the cause. A shortage caused by ordinary shrinkage may be posted to cost of goods sold if management treats it as part of normal trading activity. A material theft, fire, spoilage event, or abnormal loss should usually be shown separately so management can see what happened. An overage should not be treated as income until the team proves it is not an unrecorded purchase or cut-off error.

For a shortage under a perpetual system, the common entry is:

For an overage after investigation, the entry may be:

Use the overage entry carefully. If the overage is actually goods received from a supplier but not recorded, the credit may be accounts payable or goods received not invoiced, not a gain. If it is a sales return sitting in the warehouse without a credit note, the entry may need to reverse part of revenue or receivables. A balanced entry is not enough; it must tell the right story.

In a periodic inventory system, the adjustment is often absorbed through the ending inventory and cost of goods sold calculation. In a perpetual system, the adjustment updates the inventory account directly. The [debit](/glossary#debit) and [credit](/glossary#credit) logic is the same either way: inventory increases with a debit and decreases with a credit.

Worked Example: Shortage Found in a Riyadh Stock Count

Riyadh Campus Supplies sells calculators, notebooks, and exam materials to universities. At 31 March, the perpetual inventory listing shows 420 scientific calculators at a weighted average cost of SAR 95 each. The physical count finds only 400 calculators. The finance team recounts the shelf, checks March shipments, and confirms that 20 units are missing. There is no evidence of a supplier invoice cut-off issue.

The shortage is valued at 20 units x SAR 95 = SAR 1,900.

If management classifies the shortage as ordinary shrinkage, the entry is:

Some companies debit cost of goods sold instead of a separate shrinkage account. That can be acceptable when shrinkage is ordinary and immaterial, but a separate account is often better for learning and control because it shows how much stock disappeared outside normal sales. If the shortage becomes material, the company should investigate causes and consider separate presentation or disclosure based on its reporting policy.

After this entry, inventory for that SKU agrees to the approved count value of SAR 38,000. The [trial balance](/glossary#trial-balance) still balances, and March profit includes the loss in the correct period.

Worked Example: Overage and Net Realisable Value Write-Down

Now assume Jeddah Outdoor Gear counts camping stoves at year-end. The system shows 150 units at SAR 180 each, or SAR 27,000. The physical count finds 158 units. The receiving team reviews December documents and finds that 8 units were received from a supplier on 30 December but the goods receipt was never posted. The supplier invoice was already recorded in accounts payable.

The overage is 8 units x SAR 180 = SAR 1,440. Because the payable already exists, the correction is to bring inventory into the books:

If the supplier invoice had not been recorded at all, the credit would normally be accounts payable or goods received not invoiced. That is why the investigation matters. The same counted overage can require a different credit depending on what the system missed.

During the same review, the team finds 40 older tents carried at SAR 320 each. Because a newer model has launched, the tents can sell for only SAR 285 each, and expected selling costs are SAR 15 per unit. Net realisable value is SAR 270 per unit, below the SAR 320 cost. The write-down is 40 x SAR 50 = SAR 2,000.

This second entry is not a count shortage. The tents exist, but IAS 2 prevents the company from carrying them above net realisable value. That is the point where inventory counting and inventory measurement meet.

How Does an Inventory Count Adjustment Journal Entry Affect COGS?

An inventory count adjustment journal entry affects cost of goods sold when the adjustment changes the cost assigned to goods that are no longer available for sale. If inventory is credited for a shortage and the debit goes to cost of goods sold, gross profit decreases. If inventory is debited for a verified overage and the credit reduces cost of goods sold, gross profit increases. This is why count accuracy is not just a warehouse concern.

The connection is easiest to see through the basic COGS formula:

Beginning inventory + purchases and direct costs - ending inventory = cost of goods sold

If ending inventory is overstated, cost of goods sold is understated and profit is overstated. If ending inventory is understated, cost of goods sold is overstated and profit is understated. That relationship is explained in more detail in the [how to calculate cost of goods sold](/learn/how-to-calculate-cogs) guide, but inventory count adjustments are where the formula becomes real.

In a perpetual system, many sales already posted cost of goods sold during the month. The count adjustment then cleans up the difference between recorded stock and actual stock. In a periodic system, the physical count often creates the ending inventory number used in the COGS calculation. Either way, the count has to be reliable before the financial statements can be reliable.

Good teams keep an adjustment analysis by reason code: shrinkage, damage, expiry, receiving error, sales cut-off, production yield, and system correction. That turns the journal entry into useful management information instead of a monthly mystery.

Common Mistakes in Inventory Count Adjustment Journal Entry Work

The first mistake is posting all variances to one vague expense account. That may balance the books, but it hides whether the business has theft, damage, receiving mistakes, pricing errors, or old stock. A better chart separates normal shrinkage from abnormal losses and inventory write-downs.

The second mistake is treating every overage as income. An overage often means something was received, returned, transferred, or sold incorrectly in the system. If the accountant credits income before checking documents, the entry may create a fake gain while leaving a supplier, customer, or inventory transfer error unresolved.

The third mistake is mixing quantity adjustments with cost adjustments. A physical count answers how many units exist. IAS 2 measurement answers what those units are worth. A count can be perfect and the inventory can still need a write-down because net realisable value has fallen. Keep those two questions separate.

Watch for these specific errors:

• Using selling price instead of cost to value the count variance.
• Forgetting to apply the approved FIFO or weighted average cost method.
• Posting shortages into the wrong accounting period.
• Ignoring VAT and supplier cut-off when overages relate to unrecorded receipts.
• Netting large shortages and overages together instead of reviewing them separately.
• Failing to document approval for manual inventory adjustments.

The professional habit is to ask, "What happened operationally, what value should inventory carry, and what entry explains both?" If you can answer those three questions, the posting will usually follow cleanly.

Practice Inventory Count Adjustments on Accountery

The best way to learn this topic is to post the same count variance under different causes. Start with a simple shortage, then change one fact: the missing units were damaged, the supplier invoice was not recorded, the sales shipment was posted in the wrong month, or the stock still exists but its selling price has fallen. Each fact changes the entry or the account classification.

Use this checklist when practicing:

• Compare the physical quantity with the perpetual listing.
• Cost the variance using the approved inventory method.
• Decide whether the issue is shortage, overage, damage, cut-off, or write-down.
• Choose the account that tells the real cause.
• Confirm total debits equal total credits.
• Reconcile the final inventory balance back to the count sheet.
• Explain the effect on gross profit and closing inventory.

Accountery exercises are built for that sequence. You can practice blank [journal entry](/learn/how-to-record-journal-entries) scenarios, inventory count variances, and month-end review cases where the answer is not just a number but a defensible accounting explanation. For SOCPA, ACCA, and CMA candidates, that matters because exam questions rarely reward a memorised entry when the facts point to a different cause.

Once you can connect the count sheet, the valuation method, the adjustment entry, and the financial statement effect, the inventory count adjustment stops being a mechanical correction. It becomes a useful close control.