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To fix an inventory discrepancy in Canadian books, recount the item, check the last receiving and shipping documents, and only then record a dated adjustment. Most gaps are timing slips or counting errors, not theft. For tax, inventory is valued at the lower of cost and fair market value at year end.
How do you find the cause of a discrepancy?
Start with the boring explanations. A delivery got received but never entered. A sale was rung up under the wrong item code. Two similar products got swapped on the shelf. Those three cause more gaps than anything else, and all of them show up in paperwork.
Work backwards from the count. Take the last date the books and the shelf agreed, then list every receipt, sale, return and transfer since. One of them will usually be missing or entered twice. If you have a point of sale or restocking system, pull its transaction history for that item. The CRA says to keep the records those electronic systems create, along with paper ones, so the data should still be there.
Count again before you chase a cause. A second person counting the same bin takes ten minutes, and it kills a surprising number of problems before anyone has to read a single transaction log.
What does a missing item cost you?
More than its purchase price, and that surprises people. Say you sell an item for $100 that cost you $60. That’s a $40 profit, a 40% margin, or a 66.7% markup on cost (the profit margin calculator shows both).
Now your count finds 500 units and the books say 520. Twenty units are gone. At cost that’s $1,200. At the selling price it’s $2,000 of sales you can’t make, and $800 of profit with them. The gap is 3.8% of what the books claimed, which the percentage calculator confirms.
So a $1,200 write-down is the accounting number, but the real hit to the business is larger. That’s worth saying out loud when you decide how much effort a recount deserves.
Should you count everything, or just some items?
Both, at different speeds. A full count once a year gives you the year-end figure. Between those, a rolling check keeps the books honest: count your best sellers and your priciest items often, and the slow, cheap ones less. This is what people mean when they talk about a perpetual inventory system, where the records update with every sale and delivery and you spot-check them against the shelf.
Picture a hardware store in Saskatoon with 4,000 items. Counting all of them monthly isn’t realistic, but counting the 100 that make most of the money is. A few hours, once a month, and surprises shrink.
How does the CRA expect inventory to be valued?
The basic rule is in section 10(1) of the Income Tax Act: inventory is valued at year end at the lower of cost and fair market value, or in a prescribed manner. The details below come from the CRA’s inventory valuation bulletin IT-473R. It is archived and dated 1998, so treat it as background and check current CRA pages or your accountant before you rely on a detail.
| Item | What the bulletin says |
|---|---|
| Usual method | Each item at the lower of its cost or its fair market value at year end |
| Other method | The whole inventory at fair market value at year end |
| Cost | Original cost plus what it took to bring the item to its condition and place at year end, such as duties and transportation |
| Physical count | Normally carried out at year end; a perpetual system can stand in if it’s checked against actual quantities from time to time |
| Damaged or obsolete goods | Net realizable value can be used when goods have deteriorated and can’t be sold through normal channels |
Whatever method you pick, keep using it. That’s the point of the tax rule, and it makes year-to-year results comparable.
How should you record the write-down?
Once the recount and the paper search are done and a gap remains, record it. Use a dated adjustment entry that names the item, the quantity, the unit cost and the cause, even if the cause is “unknown after recount”. Have someone other than the person who counts the stock approve it. For small amounts, say under a couple hundred bucks, a quick sign-off is enough. For bigger ones, tell your accountant before year end, so the number doesn’t surprise anyone at tax time.
Mistakes that make discrepancies worse
Adjusting the count to match the books is the classic one. It hides the problem and leaves you with a record you can’t defend. Write the difference down as a separate entry with a date, the item, the quantities and the reason you found (or the fact that you didn’t).
Another is waiting until year end. A perpetual system only works if someone checks it against the shelf now and then. Count your fastest sellers monthly and the slow ones once or twice a year.
And don’t throw the evidence away, because the day an adjustment gets questioned is the day you’ll want the count sheets and receiving slips in front of you. The CRA’s general rule is to keep records for six years from the end of the last tax year they relate to. Some records, such as those on long-term property or the share registry, go on for longer. Destroying them earlier needs CRA permission.
What about a supplier who shorted you? Claim deadlines sit in your supplier agreement, and we couldn’t confirm any standard one. Check it.
What this page is based on
Checked in November 2026. The valuation rule is from section 10(1) of the Income Tax Act (the Justice Laws site showed it current to 19 October 2026), and the valuation details are from CRA bulletin IT-473R (archived, 1998). The record-keeping periods come from the CRA’s page on how long to keep records. The margin example uses our own calculators, with the $60 cost and $100 price chosen for the example. None of it replaces what your own accountant sees in your books.
Keeping GST/HST straight matters too. A $2,000 purchase in Ontario carries $260 in HST according to the GST/HST calculator, so check whether the unit costs in your books include tax before you blame the count for a gap in dollars. If lost stock changes your year-end profit, rerun your estimate with the self-employed tax calculator or the corporate tax calculator. For sellers who hold stock at an online marketplace, see accounting for Amazon FBA sales and e-commerce record keeping, and for choosing software see bookkeeping systems for startups.
Frequently asked questions
What causes most inventory discrepancies?
Timing slips and entry errors: a delivery received but never logged, a sale rung up under the wrong item code, two similar products swapped on the shelf, or a double entry. Theft is possible but rarely the first answer. A second person recounting the same bin clears up many gaps in ten minutes.
Do I have to count stock at year end?
The CRA's archived bulletin IT-473R says a physical count is normally carried out at year end. A perpetual inventory system can stand in if its records are checked against actual quantities from time to time. Because the bulletin dates from 1998, confirm the current expectation with your accountant.
How is inventory valued for tax in Canada?
Section 10(1) of the Income Tax Act values inventory at year end at the lower of cost and fair market value, or in a prescribed manner. The CRA bulletin also describes valuing the whole inventory at fair market value. Whatever method you choose, keep using it from year to year.
How long do I keep inventory records?
The CRA says generally six years from the end of the last tax year they relate to. Some records, such as those for long-term property, are kept longer, and destroying records earlier needs CRA permission. Keep count sheets, receiving slips and adjustment entries together so you can defend a write-down.
Should I change the books to match the count?
Not silently. Record the difference as a dated adjustment that names the item, the quantity, the unit cost and the cause, even if the cause is unknown after recount. Have someone other than the counter approve it, and tell your accountant before year end if the amount is large.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST