How often should my business do a physical inventory count and how do I record adjustments?
Every business carrying inventory should do a full physical count at least once a year. That said, once a year is really the bare minimum. If you only count annually, you’re operating on assumptions for eleven months and any shrinkage, spoilage, or miscounts quietly eat into your margins without you knowing.
For most small businesses in Central Florida, quarterly counts hit the right balance between effort and accuracy. You catch discrepancies before they snowball, and your financial statements reflect reality throughout the year instead of just at year end. Restaurants and food service businesses often need to count weekly for perishables and monthly for everything else. Retail shops and e-commerce sellers with hundreds of SKUs benefit from cycle counting, where you count a rotating portion of inventory each week or month so that over time everything gets counted without shutting down for a full day.
High-value items deserve more attention regardless of your overall schedule. If you sell products worth hundreds or thousands of dollars each, count those monthly even if you only do a full count quarterly.
When your physical count doesn’t match what your system shows, you record an inventory adjustment. In QuickBooks Online, you use the Inventory Quantity Adjustment feature. For each item where the count differs, you enter the actual quantity on hand and the system calculates the difference. Two accounts are affected. Your inventory asset on the balance sheet increases or decreases to reflect what you actually have. The other side of the entry goes to an expense account, usually called Inventory Shrinkage or Inventory Adjustment. That expense shows up on your profit and loss and directly reduces your bottom line.
If the adjustment is small, it might just be normal variance from rounding, breakage, or minor counting errors. If it’s large, don’t just record it and move on. Investigate the cause. Common reasons include receiving errors where you were shorted by a supplier but recorded the full amount, damage that was thrown away but never logged, theft, or items sold but not properly scanned. Figuring out the root cause is how you prevent it from happening again.
Document every count thoroughly. Record who counted, the date, what sections were covered, and the adjustments that resulted. This protects you in an audit and helps you spot trends. If the same product category shows shrinkage every quarter, that tells you something specific needs to change in how you handle those items.
Working with a small business bookkeeper who understands inventory accounting makes the adjustment process much smoother. They can set up the right accounts in your system, make sure your cost of goods sold stays accurate, and help you establish a counting schedule that fits your business without being a burden on your operations. The goal is accurate numbers you can trust when making purchasing and pricing decisions.
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More Questions
How do I track cost of goods sold when my supplier prices change every order?
Use a consistent inventory costing method like weighted average or FIFO. QuickBooks Online calculates FIFO automatically when inventory tracking is enabled, so your COGS stays accurate even as purchase prices shift.
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Look at your reports, your reconciliations, and how well your bookkeeper can explain your numbers. If any of those areas feel unclear or inconsistent, there's likely a problem worth investigating.
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Use classes or projects in your accounting software to tag every transaction to a specific contract. This lets you see revenue and expenses per client so you know which contracts are actually profitable and which ones are costing you money.
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In QuickBooks Online Plus or Advanced, create a class for each property and assign it to every income and expense transaction. Then run the Profit and Loss by Class report to see exactly how each property is performing.
Read answerWhat's the best way for a retail store to catch and track inventory shrinkage?
Regular physical inventory counts compared against your book inventory reveal shrinkage. The key is doing counts frequently enough to catch problems early and categorizing losses so you can identify patterns and root causes.
Read answerHow do I set up inventory tracking in QuickBooks Online without making it overly complicated?
Enable inventory tracking in QBO settings, create inventory-type products with accurate costs and starting quantities, and only track items you actually sell. The biggest mistake is trying to track everything.
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