Common Inventory Adjustments and Typical Mistakes in Entries

Why inventory entry mistakes happen (and how to prevent them)

Most inventory posting errors come from mixing rules from different systems (periodic vs. perpetual), forgetting that some events require two entries, or posting to the wrong “side” (debit vs. credit). The fastest way to prevent and correct mistakes is to (1) know which accounts should move for a given event, and (2) sanity-check the entry using normal account behavior.

Quick behavior checks (sanity tests)

• Inventory should not increase on a sale. A sale reduces inventory (perpetual) or leaves inventory untouched until period-end (periodic).
• COGS should not be posted on a purchase. Purchases create inventory (or Purchases) first; COGS is recognized when goods are sold (perpetual) or at period-end (periodic).
• Sales Returns and Allowances is a contra-revenue account. It reduces revenue; it is not an inventory account.
• Accounts Payable decreases with a debit. If you return goods to a supplier and still credit A/P, you increased what you owe—opposite of what you want.
• Expense accounts (like COGS) normally increase with debits. If COGS is credited on a normal sale, that is a red flag.

Frequent issue #1: Confusing Purchases vs. Inventory (periodic vs. perpetual)

Beginners often post purchases to the wrong account because they remember “Inventory” from perpetual, but they are working in a periodic set of books (or vice versa). The fix is to identify the system used and follow its account flow.

How to spot it

• If you see an entry Dr Purchases in a perpetual system, that is usually wrong.
• If you see an entry Dr Inventory in a periodic system (during the period), that is usually wrong (unless the company uses a hybrid or special approach).

Correcting entry pattern

Scenario: Company uses perpetual. A $2,000 purchase on credit was posted as:

Dr Purchases .......... 2,000  (wrong in perpetual)  Cr Accounts Payable .. 2,000

Step-by-step correction:

1. Identify the wrong account: Purchases was used instead of Inventory.
2. Reclassify Purchases to Inventory (no cash/AP change needed).
3. Post the correcting entry:

Dr Inventory .......... 2,000  Cr Purchases .......... 2,000

Result check: Inventory increases; A/P stays correct.

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Frequent issue #2: Forgetting the second entry for COGS under perpetual

In a perpetual system, a sale typically requires two entries: one for revenue (and cash/receivable) and one to move cost from Inventory to COGS. Beginners often record only the revenue side.

How to spot it

• Sales are recorded, but COGS is unusually low or zero.
• Inventory stays too high even though items were sold.
• Gross margin looks unrealistically high.

Correcting entry pattern

Scenario: Sold goods for $1,500 on account. Cost of the goods sold was $900. Only this was posted:

Dr Accounts Receivable  1,500  Cr Sales Revenue ...... 1,500

Step-by-step correction:

1. Confirm the missing piece: In perpetual, you must record the cost movement.
2. Determine the cost of the items sold (from the system’s item cost layers or average cost).
3. Post the missing entry:

Dr Cost of Goods Sold ..   900  Cr Inventory ..........   900

Result check: Inventory decreases on a sale; COGS increases.

Frequent issue #3: Misposting returns (customer returns vs. supplier returns)

Returns are a common source of confusion because “returns” can mean two different events: (1) a customer returns goods to you, or (2) you return goods to a supplier. Each affects different accounts.

A. Customer returns recorded like supplier returns (or vice versa)

How to spot it: You see Accounts Payable used in a customer return, or Sales Returns used in a supplier return.

B. Supplier return posted with the wrong sign (A/P credited instead of debited)

Scenario: Returned $400 of defective goods to supplier on account (perpetual). Posted as:

Dr Accounts Payable ....   400  Cr Inventory ..........   400

What’s wrong: Debiting A/P reduces what you owe (that part is correct). The common mistake is actually the opposite entry: many beginners incorrectly credit A/P. To practice diagnosis, assume the posted entry was:

Dr Inventory ..........   400  Cr Accounts Payable ....   400

Step-by-step correction:

1. Identify the direction: Returning to supplier should reduce inventory and reduce the liability.
2. Reverse the wrong entry (to remove its effect).
3. Post the correct entry.

Option 1 (reverse then correct):

1) Reverse wrong entry:  Dr Accounts Payable .... 400  Cr Inventory .......... 400 2) Record correct entry: Dr Accounts Payable .... 400  Cr Inventory .......... 400

Option 2 (net correction): If the wrong entry increased both Inventory and A/P by $400, the net correction is:

Dr Accounts Payable ....   800  Cr Inventory ..........   800

Result check: Inventory goes down; A/P goes down.

Frequent issue #4: Mixing up debits and credits (using account behavior to self-check)

Instead of memorizing every entry, use “normal balance” logic to catch errors quickly.

Normal balance cheat sheet (for this chapter’s accounts)

• Inventory (asset): normally debit
• Accounts Receivable (asset): normally debit
• Accounts Payable (liability): normally credit
• Sales Revenue (revenue): normally credit
• Sales Returns and Allowances (contra-revenue): normally debit
• COGS (expense): normally debit

Practical self-check questions

• Did an asset increase? Then it should be debited (e.g., Inventory on purchase in perpetual).
• Did a liability decrease? Then it should be debited (e.g., A/P on supplier return or payment).
• Did revenue decrease? Then use a debit to a contra-revenue account (Sales Returns and Allowances).
• Did inventory leave the company? Then inventory should be credited (perpetual sale).

Error diagnosis scenarios (identify the problem and rewrite the correct entry)

Scenario 1: Inventory increases on a sale

Posted entry (perpetual): Sold goods for $800 cash; cost $500.

Dr Cash ...............   800  Cr Sales Revenue ......   800 Dr Inventory ..........   500  Cr Cost of Goods Sold .   500

What’s wrong: Inventory was debited on a sale; it should decrease. COGS was credited; it should increase.

Correct entry:

Dr Cash ...............   800  Cr Sales Revenue ......   800 Dr Cost of Goods Sold .   500  Cr Inventory ..........   500

Scenario 2: Purchase posted to COGS

Posted entry: Bought $1,200 of goods on account (perpetual).

Dr Cost of Goods Sold . 1,200  Cr Accounts Payable ... 1,200

What’s wrong: A purchase is not COGS at the time of purchase; it should increase Inventory (perpetual).

Correcting entry (reclassify):

Dr Inventory .......... 1,200  Cr Cost of Goods Sold . 1,200

Scenario 3: Customer return posted as a supplier return

Posted entry: Customer returned goods sold for $300 on account; cost was $180 (perpetual). Entry posted:

Dr Accounts Payable ....   300  Cr Inventory ..........   300

What’s wrong: This uses A/P (supplier-related) and treats the return like inventory leaving. A customer return reduces A/R (or increases a refund liability/cash out) and reduces revenue; in perpetual it also increases Inventory and reduces COGS.

Correct entry (perpetual):

Dr Sales Returns and Allowances  300  Cr Accounts Receivable ........ 300 Dr Inventory ................... 180  Cr Cost of Goods Sold ......... 180

Scenario 4: Supplier return posted to Sales Returns

Posted entry: Returned $250 of goods to supplier on account (periodic system). Entry posted:

Dr Sales Returns and Allowances  250  Cr Accounts Payable ........... 250

What’s wrong: Sales Returns is for customer returns (contra-revenue). A supplier return reduces what you owe and reduces purchases (periodic) or inventory (perpetual).

Correct entry (periodic):

Dr Accounts Payable .... 250  Cr Purchase Returns and Allowances 250

Scenario 5: Missing COGS entry discovered by account behavior

Clue: Sales were posted all month, but Inventory did not change and COGS is near zero. Books are supposed to be perpetual.

Diagnosis: The second entry (COGS/Inventory) was not recorded on sales.

Fix approach (step-by-step):

1. Run a report of sales shipments (quantities) and match to item costs.
2. Compute total missing cost for the period (by item or in total).
3. Post a summary correcting entry (if acceptable under company policy) or post by transaction.

Summary correcting entry example: Total missing cost identified: $12,400.

Dr Cost of Goods Sold .. 12,400  Cr Inventory .......... 12,400

Correcting entries: practical rules to avoid making it worse

Rule 1: Decide whether to reverse, reclassify, or adjust

• Reverse when the entire entry is wrong (wrong event, wrong direction, wrong accounts).
• Reclassify when the amount is right but the account is wrong (e.g., Purchases vs Inventory).
• Adjust when part of the entry is missing (e.g., missing COGS entry) or amount is partially wrong.

Rule 2: Use a “before vs. after” effect check

Write down what should happen to each account (increase/decrease) before you post the fix. Example for a perpetual sale: Cash/A/R up, Sales Revenue up, COGS up, Inventory down. If your correcting entry does not produce these directions, stop and re-check.

Rule 3: Keep documentation tied to the correction

For each correction, note the source (invoice, credit memo, return authorization, shipment record) and the reason (wrong account, missing entry, transposed debit/credit). This makes later review and audit trails much easier.