When your inventory records don’t match your physical count, your books are showing a different value of inventory than what’s actually sitting on your shelves. This is called an inventory variance, and it’s more common than most business owners expect. The key is to figure out why it happened, correct it in your accounting system, and put processes in place so the gap doesn’t keep growing.

Data entry errors are the most frequent cause. Someone receives 50 units but enters 500. Items get sold but never recorded as leaving inventory. Products get moved between locations without anyone updating the system. These small mistakes compound over time and can create significant dollar variances. Theft and damage are another common factor. Damaged goods that get thrown away without being written off create phantom inventory that exists in your records but not in reality.

Timing differences also cause mismatches. If you receive a shipment right before a physical count but the invoice hasn’t been entered yet, the physical count will be higher than your records. The reverse happens when items are shipped but the system hasn’t caught up.

Before making any adjustments, investigate. Recount the items with the biggest variances. Check recent receiving documents and sales records. Look for pending transactions that might explain the difference. Sometimes the answer is simple and the count was just done wrong.

Once you’ve confirmed real variances, you need to make inventory adjustment entries in your accounting system. These adjustments typically hit your cost of goods sold or a dedicated inventory shrinkage expense account. Either way, the adjustment reduces your asset value on the balance sheet and increases expenses on the income statement, which lowers your reported profit. This matters for taxes and financial reporting. Overstated inventory means your cost of goods sold is too low, which means you’re reporting more profit than you actually earned and potentially overpaying on taxes.

Regular cycle counts help prevent large discrepancies from building up. Instead of counting everything once a year, count a portion of your inventory each week or month. This spreads the workload and catches problems early when they’re easier to trace. Good receiving procedures matter too. Every delivery should be checked against the purchase order before anything gets entered into the system. Proper inventory accounting requires consistent processes on the ground floor, not just accurate data entry after the fact.

If you’re finding recurring discrepancies and can’t pinpoint the cause, it’s worth getting a bookkeeper in Chandler who understands inventory-based businesses to review your setup. Often the root issue is a workflow gap or a misconfigured system rather than a single mistake, and someone with experience can identify the pattern you’re missing.