Inventory Shortages, Surpluses & Mis-sorting Accounting

Inventory Shortages, Surpluses, and Mis-sorting: How to Document and Account for Them

Shortages, surpluses, and mis-sorting cannot be resolved "technically" or solely by an internal agreement between the warehouse and the accounting department. For business, the safe procedure is as follows: first, record the actual availability of goods with proper primary documents, then establish the cause of the difference, separately assess whether there are active natural shrinkage norms, and only then reflect the operation in accounting, taxes, and, if necessary, in claims work or in recovering damages from the guilty party. Enterprises are obliged to conduct an inventory of assets and liabilities, and the results must be documented. (Legislation of Ukraine)

When Shortages, Surpluses, and Mis-sorting Occur

A shortage is a difference where the actual quantity of goods is less than according to accounting or accompanying documents. A surplus is when the actual quantity is greater. Mis-sorting is a situation where a shortage of some items and a surplus of others are discovered simultaneously, which actually indicates an error in identification, release, labeling, or accounting of goods.

Most often, such differences appear in two situations: during the receipt of goods from a supplier or carrier and during an inventory in a warehouse, shop, production facility, or point of sale. For businesses, these are different scenarios, because the set of documents, the method of accounting reflection, and the issue of claims against a supplier, carrier, or employee depend on them.

What is Considered Natural Shrinkage and What is Above-Norm Shortage

Natural shrinkage is applied only when active natural shrinkage norms exist for the relevant good or inventory. If there are no such norms, the loss for accounting purposes is considered an above-norm shortage. For certain goods, natural shrinkage norms are still valid in special acts, particularly for certain food products, grain, petroleum products, and other categories. (Legislation of Ukraine)

Another distinction is important for accounting. If a shortage within natural shrinkage norms is discovered during the transportation of purchased inventory, it is attributed to the increase in the initial cost of the capitalized inventory. If it concerns shortages within natural shrinkage norms during storage or above-norm shortages, these are expenses of the reporting period. Above-norm losses and shortages are not included in the initial cost of inventory. (Legislation of Ukraine)

When Inventory is Mandatory and How to Conduct It

Inventory is necessary to confirm the presence, condition, and valuation of assets and liabilities. The Accounting Law explicitly requires it to ensure the reliability of accounting data and financial reporting. Inventory is mandatory before preparing annual financial statements. (Legislation of Ukraine)

To conduct an inventory, the manager issues an administrative document to create an inventory commission. The presence of assets is established by mandatory counting, weighing, and measuring. Inventory descriptions or acts are signed by all commission members and financially responsible persons; financially responsible persons also provide a receipt stating that the inspection took place in their presence and that they accept the assets listed in the description for responsible storage. (Legislation of Ukraine)

It is advisable to finalize the commission's results with a protocol, and in case of discrepancies, with a separate decision by the manager on exactly how to reflect these differences in accounting. Such an approach is directly recommended in the current official inventory methodology. (Legislation of Ukraine)

What Documents Need to be Prepared

Primary documents are the basis for accounting. An enterprise can use both standard forms and self-developed ones, but they must contain all the details stipulated by Regulation No. 88: the name of the enterprise, the name of the document, the date of preparation, the content and volume of the operation, the unit of measurement, positions and surnames of responsible persons, signature or other data to identify the person. Electronic primary documents are also allowed subject to compliance with electronic document legislation. (Legislation of Ukraine)

For a shortage or surplus resulting from an inventory, the following are usually prepared:

For a shortage discovered upon receipt of goods, an act of discrepancies or another primary document with mandatory details is required, followed by a claim package to the supplier or carrier according to the contract and transportation rules.

Shortage Upon Receipt of Goods from a Supplier

First of all, look at the supply contract. The official position of authorities is: if the parties themselves regulated the order of acceptance-transfer of products, the contract applies; if not, Instructions P-6 and P-7 regarding acceptance of products by quantity and quality are applied. This is still an important guideline for disputes with suppliers. (Legislation of Ukraine)

In accounting, the difference must be divided. A shortage within valid natural shrinkage norms during transportation increases the initial cost of actually capitalized inventory. An above-norm shortage is not included in the initial cost; it is either presented for reimbursement to the guilty party or written off as expenses if there are no grounds for recovery. (Legislation of Ukraine)

Shortage Discovered During Inventory

If a shortage is discovered specifically through an inventory, it is reflected as a result of internal control over asset preservation. According to Methodological Recommendations No. 2, inventory shortages and losses within natural shrinkage norms during storage, as well as above-norm shortages, are recognized as reporting period expenses. In standard methodology, sub-account 947 is used for this. Above-norm shortages, until guilty persons are identified, are additionally shown on off-balance sub-account 072. After identifying the persons who must compensate the damage, accounts receivable and other operating income are recognized. (Legislation of Ukraine)

Therefore, the safe sequence for the enterprise is as follows:

How to Capitalize Surpluses

Surpluses discovered by inventory cannot be left "off the books." Under current Methodological Recommendations No. 2, they are capitalized at net realizable value if these inventories will be sold, or at an estimated possible use value if they will be used by the enterprise itself. For inventories in general, the rule of valuation at the lower of two values applies — initial cost or net realizable value. (Legislation of Ukraine)

For a store, this means: if the found good will normally be sold, it must be capitalized at its actual net realizable value, not at an arbitrary symbolic amount.

How to Document Mis-sorting

Mis-sorting is the riskiest area, as this is where businesses most often try to "collapse" shortage and surplus without sufficient grounds. The safe approach is as follows: first record surpluses and shortages separately, and make a mutual offset only when there is an obvious and documented mis-sorting. In inventory practice, mutual offset is considered an exception: for the same period, the same financially responsible person, the same nomenclature, and in identical quantities; a proposal for offset is considered by the commission, and the final decision is made by the manager. (Legislation of Ukraine)

If after such an offset the value of the missing goods is greater than the value of the surplus goods, the difference is subject to reimbursement by the guilty party. If the specific culprit is not identified, the sum difference is treated as an above-norm shortage and written off as expenses. (Legislation of Ukraine)

Taxes: What to Consider

Income Tax

For corporate income taxpayers, the basic principle is: the taxable object is formed from the financial result before taxation according to accounting data, adjusted for differences explicitly stipulated by Section III of the Tax Code. The Code generally does not establish a separate specific difference precisely for ordinary inventory shortages, surpluses, or mis-sorting, so the tax result in most cases follows the accounting record. (Legislation of Ukraine)

VAT

The biggest tax risk usually arises regarding above-norm shortages or losses of goods for which a tax credit was formed. Paragraph 198.5 of the TCU requires accruing tax liabilities if such goods start being used, in particular, in operations that are not a business activity. The tax base for goods in such a case is determined according to paragraph 189.1 of the TCU based on their purchase cost. Therefore, for above-norm losses, the VAT issue must be analyzed separately by the cause of loss and the set of primary documents. (Legislation of Ukraine)

Excise Duty

A separate risk applies to retail trade in excisable goods. If the presence or location of such goods is not confirmed, including if a shortage is discovered by an inventory conducted at the request of a controlling authority during an audit, the date of occurrence of a tax liability is the date of drawing up the relevant document certifying such facts. This is especially important for alcohol, tobacco, e-cigarette liquids, and other excisable retail products. (ck.tax.gov.ua)

RRO/PRRO and Inventory Accounting

An inventory difference by itself is not a settlement operation. The RRO Law defines a settlement operation as accepting cash, cards, payment checks, tokens, etc., from a buyer at the place of sale of goods or processing documents regarding refunds. Therefore, shortages, surpluses, and mis-sorting are documented by primary documents and adjustments to inventory and accounting records, rather than by "technical" fiscal receipts without a real sale or return. (Legislation of Ukraine)

At the same time, for those entities covered by the RRO Law, there is an obligation to keep records of inventory and sell only goods reflected in such accounting. At the start of an inspection, documents confirming the accounting and origin of goods at the place of sale must be provided. For Sole Proprietors (FOPs) obligated to keep such records, the procedure and form are defined by Ministry of Finance Order No. 496. (Legislation of Ukraine)

If an enterprise sells unaccounted goods or fails to provide documents confirming inventory accounting at the place of sale during an inspection, a financial sanction is applied in the amount of the value of such goods at sale prices, but not less than ten non-taxable minimum incomes of citizens. (Legislation of Ukraine)

Can a Shortage be Automatically Written Off Against an Employee?

No. An employee's material liability does not arise automatically merely from the fact of a shortage. Under the Labor Code, an employee is responsible for direct actual damage caused by guilty unlawful actions or inaction, and only within the limits and order established by law. The general rule is that liability is limited to a certain portion of earnings, unless otherwise explicitly provided by law. The employer is also obliged to create conditions for safeguarding property. (Legislation of Ukraine)

A written agreement on full material liability can be concluded not with just any employee, but only with an adult employee whose work is directly related to the storage, processing, sale, release, transportation, or use of valuables entrusted to them, or in other cases explicitly provided by law. (Legislation of Ukraine)

If the damage amount does not exceed the employee's average monthly earnings, the employer may issue an order for deduction from the salary, but no later than two weeks from the day the damage was discovered and no earlier than seven days from notifying the employee. In other cases, compensation is recovered through the court. (Legislation of Ukraine)

Typical Business Mistakes

Entrepreneurs most often make the following mistakes:

A Practical Guideline from Judicial Practice

The Supreme Court, in its review of the practice of the Administrative Court of Cassation, noted that conducting an inventory of goods by a taxpayer at the request of a controlling authority during a tax audit is the only legally established means of proving a shortage or availability of goods at the taxpayer. For businesses, this means that inventory documents must be prepared flawlessly, as they can become key evidence in a dispute with the tax authority. (Supreme Court of Ukraine)

What an Entrepreneur Should Do on the Day a Shortage or Surplus is Discovered

Detection and Recording of Shortages, Surpluses, and Mis-sorting in Torgsoft Accounting Program

In the Torgsoft accounting program, processes for detecting and recording shortages, surpluses, and mis-sorting are closely linked to conducting inventory counts. Usually, such discrepancies between physical availability and computer records arise from staff errors, confusing items during a sale, or due to theft.

To record these circumstances and level balances, an "Inventory Statement" is used. Inventory is also applied to remove "negative balances" (minuses) in the warehouse, which could have arisen due to the sale of uncapitalized goods.

Here is a detailed description of how the program processes each of these situations after finishing the item count:

1. How Surpluses and Shortages are Processed

When the actual quantity of an item is entered into the inventory statement, the user must click the "Close statement" button. At this moment, Torgsoft automatically adjusts the warehouse by creating corresponding documents:

2. How Mis-sorting (Mutual Offset) Works

Mis-sorting in Torgsoft occurs in situations where a surplus and a shortage of one product model, but a different grade (e.g., different color or size), are found simultaneously.

The program can automatically perform a mutual offset of such surpluses and shortages. How it is calculated in practice: Suppose accounting shows 5 black socks (purchase price 12 UAH) and 5 brown socks (price 10 UAH) should be in the warehouse. During inventory, it was found there are only 3 black socks (shortage of 2 pcs.) and 7 brown ones (surplus of 2 pcs.).

3. Final Shortage Calculation and Impact on Profit

If, after mutual offset of a mis-sort, the value of written-off goods exceeds the value of those in surplus, the difference is recorded as a shortage. The formula in Torgsoft looks like this: Shortage Amount = Write-off Amount - Mis-sort Amount. It is this final "Shortage Amount" that cannot be less than zero and directly affects the store's total profit calculation, reducing it.

4. Special Circumstances: Serial Number Mis-sorting

If a store keeps strict records of warranty items by serial numbers, a specific mis-sort can occur: a serial number physically does not exist, but it is in the program, and vice versa—there is an item with another serial number that, according to the program, has already been sold. This happens when a seller hands a client the wrong box.

5. Results Reporting

To analyze shortages, surpluses, and mis-sorts, an owner or merchandiser can print special reports directly from the inventory form:

Official Sources

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