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When the shelf count and the books disagree, don’t fix the books first. Find out why the numbers differ, because inventory discrepancies in Canadian accounting are usually a timing slip or a counting error long before they are a theft. Recount the item, check the last receiving and shipping documents, and only then write down a loss.
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.
How does the CRA expect inventory to be valued?
The rules below come from the CRA’s inventory valuation bulletin IT-473R. It’s archived and dated 1998, so treat it as background and check the current CRA pages or your accountant before you rely on a detail. Its content is worth knowing.
| 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.
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.
Where the numbers come from
The valuation points come from CRA bulletin IT-473R (archived, 1998). The record-keeping periods come from the CRA’s pages on keeping 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.
Frequently asked questions
What causes most inventory discrepancies?
Timing slips and entry errors, such as a delivery never logged, a sale under the wrong item code or a double entry. Theft is possible but it's rarely the first answer.
Do I have to count stock at year end?
The CRA's archived bulletin IT-473R says a physical count should normally be done at year end. A perpetual system can replace it if it's checked against actual quantities from time to time.
How is inventory valued for tax?
Usually each item at the lower of cost or fair market value at year end, or the whole inventory at fair market value. The bulletin is archived, so check current CRA pages.
How long do I keep inventory records?
The CRA general rule is six years from the end of the last tax year they relate to. Some records must be kept longer.
Should I change the books to match the count?
Not silently. Record the difference as a dated adjustment with the reason, so the record still makes sense later.
- Self-employed taxes in Canada: income, CPP and GST
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Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.