Recording Inventory Shrinkage in QuickBooks Online (USA)

Inventory shrinkage occurs when your physical inventory is less than what QuickBooks Online shows due to theft, damage, spoilage, or errors. Properly recording shrinkage ensures your books reflect reality and your Profit & Loss statement is accurate.

Step 1 Set Up an Inventory Shrinkage/COGS Adjustment Account

Create an account to track inventory losses:

1. Go to Settings → Chart of Accounts → New
2. Select:
   • Account Type: Expenses
   • Detail Type: Cost of Goods Sold
   • Name: Inventory Shrinkage / Inventory Loss
3. Save

You may also create a COGS sub-account for more detailed tracking.

Step 2 Adjust Inventory Quantity

Method 1 Using the Built-in Quantity Adjustment (QBO Plus / Advanced)

1. Go to Sales → Products and Services
2. Find the inventory item that needs adjustment
3. Click Edit → Quantity on Hand → Adjust
4. Enter:
   • New quantity or quantity change (negative for loss)
   • Date of adjustment
   • Inventory Adjustment Account: Inventory Shrinkage / Inventory Loss (from Step 1)
   • Reason: Theft, spoilage, damage, etc.
5. Save

This reduces inventory on the Balance Sheet and records an expense in Inventory Shrinkage/COGS on the Profit & Loss statement.

Method 2 Manual Journal Entry (Advanced Option)

1. Go to + New → Journal Entry
2. Enter:
   • Debit: Inventory Shrinkage / Inventory Loss (Expense)
   • Credit: Inventory Asset (Balance Sheet account)
3. Use the date of the shrinkage
4. Save

Use this method only if the quantity adjustment feature is unavailable.

Step 3 Verify Reports

• Balance Sheet: Inventory value decreased
• Profit & Loss: Shrinkage expense shows correctly
• Inventory Valuation Summary: Reflects the reduced quantity

Step 4 Best Practices

• Perform physical inventory counts regularly
• Record shrinkage monthly or quarterly, not daily
• Keep detailed notes for audits
• Avoid entering shrinkage as a regular expense; it must adjust inventory asset

Common Mistakes to Avoid

• Coding shrinkage to generic expense accounts, which distorts P&L
• Not adjusting quantity, causing inventory on the Balance Sheet to remain overstated
• Entering as a purchase refund, which inflates cost of goods sold
• Recording as a negative sale, which distorts sales revenue

Summary Table