In this article we will provide the information related to the Journal Entries for Stolen Inventory.
When a company faces the unfortunate event of stolen inventory, it’s vital to record this loss properly in their books. Stolen inventory can happen at any stage of the business process, from production to sales.
Here, we’ll break down the steps involved in making journal entries for stolen inventory in simpler terms.
STEP 1: CALCULATE THE COST OF STOLEN INVENTORY
Before we can create journal entries for stolen inventory, we need to determine how much that stolen inventory was worth. To do this, we follow these steps:
(a) Calculate Inventory Cost with Physical Counting:
Appoint a special team to physically count the inventory in your store, production center, and sales showroom. They will update these counts in a special register.
(b) Calculate Inventory Cost Based on Book Records:
Take the inventory report that shows the book value of the inventory and its recorded quantity.
(c) Compare Book Value with Physical Value:
Now, the special team will compare the book value and quantity of stock with the actual value and quantity on hand. If the book value and quantity are greater than the actual figures, the difference represents the loss due to stolen inventory.
Note: It’s important to remember that the entire inventory may not be stolen. Some of it could be lost due to spoilage, obsolescence, or damage. These factors should also be subtracted from the difference mentioned in point (c).
STEP 2: CREATE THE JOURNAL ENTRIES
(a) When We Reduce the Inventory Balance in the Books:
 Debit the ‘Loss of Stolen Inventory Account’ or ‘Cost of Goods Sold Account’
 Credit the ‘Inventory (Closing Stock) Account’
(b) When We Transfer the Cost of Goods Sold to the Income Statement:
 Debit the ‘Trading Account’
 Credit the ‘Cost of Goods Sold Account’
In simple terms, these journal entries help the company account for the stolen inventory loss by reducing the inventory balance and reflecting the cost of goods sold on the income statement. It ensures that the company’s financial records accurately represent this unfortunate event.