Year-End Series, Part 2: Locking Down Inventory Counts & COGS
By: Ironclad Accounting + Finance | News | November 5, 2026For businesses that sell physical products, inventory can represent a substantial portion of their assets. It’s also one of the easiest numbers to get wrong.
Any misstatement in year-end inventory flows directly into cost of goods sold (COGS). From there, it affects your gross margin, taxable income, and how a lender or buyer evaluates your business.
Why the Count Matters
The basic formula is simple enough:
Beginning Inventory + Purchases − Ending Inventory = Cost of Goods Sold
If ending inventory is overstated, COGS is understated, and profit looks higher than it really is. You may end up paying tax on income you didn’t actually earn. If ending inventory is understated, the reverse happens, and your margins look worse than they are.
For example, suppose your records show $150,000 in ending inventory, but a physical count reveals only $120,000. That $30,000 difference increases COGS by $30,000 and reduces reported gross profit by the same amount, assuming the other figures are correct.
The error doesn’t end there. This year’s ending inventory becomes next year’s beginning inventory, so a mistake made in December can carry into 2027.
Plan the Count Now
A reliable count is mostly about preparation.
- Set the date and limit movement. Pause receiving and shipping during the count where possible, or carefully document anything that moves.
- Use two-person teams. One person counts and another records, using pre-numbered tags or count sheets so nothing is skipped or counted twice.
- Get the cutoff right. Determine how you’ll handle goods in transit, consigned goods, customer-owned items in your warehouse, and items received but not yet invoiced. Ownership and applicable shipping terms matter.
- Recount what matters most. High-value items and large variances deserve a second look before the count is finalized.
Reconcile and Adjust
Once the count is complete, compare it with your records and investigate the differences. A single variance may be a counting error. A pattern of shrinkage could point to a larger process problem worth addressing before next year.
This is also the time to identify obsolete, damaged, or slow-moving stock. The IRS has specific rules governing inventory valuation and write-downs, and documentation matters. Consult your accounting advisor before making adjustments.
Then review how you’re calculating the cost of your inventory. If vendor prices have risen this year, outdated cost figures may be distorting your margins. Make sure freight, duties, and other applicable costs of acquiring or producing goods are being captured consistently.
Some businesses may also qualify for simpler accounting methods. For tax years beginning in 2026, businesses with average annual gross receipts of $32 million or less over the prior three years may qualify for simplified inventory accounting, subject to additional eligibility requirements. Ask your advisor whether your current method is still the right fit.
Beyond the Tax Return
Gross margin is one of the first things a lender, investor, or potential buyer examines. When inventory and COGS are accurate and well documented, those numbers hold up under scrutiny. When they aren’t, everything built on them is open to question.
A disciplined year-end count protects the accuracy of your tax reporting today and makes your financial information more credible for the future.
If you’d like help planning your count or reviewing your inventory costs, Ironclad Accounting + Finance is here to help.
