It's impossible to have perfect turnover of your company's inventory. At some point, you're going to lose inventory to theft, damage or obsolescence. When this happens, you need to record the loss on your company's income statement to keep it updated. How you report this event depends on the size of the loss as well as whether the loss was a routine part of your business or a rare and unexpected event. There is no fixed rule for this decision -- it depends on your business. Either way, the event will be recorded in some way on your income statement to record the loss in value to your company.
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1.
Count the total units of lost inventory. Multiply this amount by their purchase price to calculate the total loss to your business. If you lost 10 boxes of inventory and you bought each box for $100, you total loss is $1,000.
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2.
Decide whether the loss was small or large relative to your total sales. This depends on your judgment. Generally, if the loss was more than 1 or 2 percent of your sale price, it should be considered a large loss.
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3.
Decide whether the loss was normal or unusual. Consider whether you've already had this kind of loss before. For example, if you sell food and a small batch goes rotten each quarter, you can consider theses losses normal. If a large amount of food goes bad because of a rare accident -- for example, someone forgot to turn on your fridge -- consider the loss unusual.
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4.
Add small and normal inventory losses to the cost of your goods sold. These small losses don't need to be recorded as a separate entry and can be absorbed as a regular cost of doing business.
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5.
Write down a separate entry for large or unusual inventory losses. Explain what happened along with the size of the loss. This entry lets investors see what caused the sudden increase in your company's costs.
