In accrual accounting, accrued inventory is what you record when goods have arrived and title has passed to your business, but the supplier’s invoice hasn’t shown up yet by the close of the period. You debit inventory to recognize the asset and credit a liability account, often called Goods Received Not Invoiced or Accrued Liabilities, so that both sides of the transaction land in the correct period. Skip the entry and you understate assets, understate liabilities, and misstate the period’s profit.
Why the Accrual Exists
Under accrual accounting, inventory becomes an asset the moment your business takes ownership of the goods, not when you pay for them and not when you sell them. Suppliers rarely invoice on the same day they ship, and shipments in the last few days of a month or quarter routinely cross the reporting cut-off with no matching bill on file. The accrual entry closes that gap. It puts the goods on your balance sheet at the estimated cost you owe and parks the obligation in a liability account until the real invoice replaces it.
The cost you accrue is the same cost you’d have capitalized had the invoice arrived on time: the net purchase price after trade discounts, plus everything needed to get the goods to your location in sellable condition. Inbound freight, import duties, insurance during transit, and handling fees all belong in the inventory figure rather than being expensed on their own.1Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods
The Journal Entry at Period End
The entry itself is short. Debit inventory for the estimated landed cost of the goods received. Credit a liability account, typically Goods Received Not Invoiced or Accrued Liabilities, for the same amount. The asset sits on the balance sheet as if it had been billed normally, and the liability captures what you owe the supplier.
When the invoice arrives in the next period, you reverse the accrual. Debit the Goods Received Not Invoiced account to clear it, and credit accounts payable for the invoiced amount. The obligation is now in the normal accounts payable workflow and will be paid on the usual terms. If the invoiced price differs from your estimate, the difference is generally booked to inventory or to a purchase price variance account, depending on your system.
When You Actually Own the Goods
Whether goods in transit belong on your books at period end turns on the shipping terms in the purchase agreement, not on where the truck happens to be.
Under FOB shipping point, sometimes called FOB origin, title and risk transfer to you when the carrier picks up the goods at the seller’s location. Goods still in transit at the reporting date are yours, and they need to be accrued even though no one at your warehouse has touched them.
Under FOB destination, the seller keeps ownership and risk until the goods arrive at your specified location. A shipment sitting on a truck at midnight on the last day of the period is still the seller’s inventory. Misreading these terms is one of the most common reasons businesses over- or under-report inventory at the close of a period.
Consignment Is Not Yours
Physical possession alone doesn’t create an accrual. If a manufacturer ships goods to you on consignment, the manufacturer keeps ownership until you sell the product to an end customer. The goods sit in your warehouse but stay on the manufacturer’s balance sheet. Don’t accrue them, and don’t count them in your ending inventory.2U.S. Securities and Exchange Commission. Codification of Staff Accounting Bulletins – Topic 13: Revenue Recognition
Why Auditors Focus on the Cut-Off
Cut-off testing is a standard audit procedure precisely because accrued inventory is easy to get wrong. Auditors pull the receiving log for the last several days of the period and trace each receipt into either a recorded invoice or a Goods Received Not Invoiced accrual. Anything received but not booked is a cut-off error. Depending on size and direction, the fix can be a simple adjusting entry or a restatement.
The practical controls are unglamorous. Match your receiving records to your open purchase orders. Compare that list to invoices posted through the cut-off. Accrue anything received that hasn’t been billed. Then, when the invoice comes in, make sure your system replaces the accrual rather than double-counting the liability.
What Costs Belong in the Accrued Amount
For a retailer or distributor, the accrued cost begins with the net purchase price after trade discounts and adds the inbound costs required to get the goods ready to sell: freight in, duties, transit insurance, and handling. For a manufacturer bringing raw materials in, the same logic applies to the incoming materials; the labor and overhead layered on during production accumulate separately as the goods move through work in process and finished goods.
A Note for Larger Businesses
If your business’s average annual gross receipts over the prior three years exceed $32 million (the inflation-adjusted threshold for 2026), Section 263A adds an additional layer of costs that must be capitalized into inventory for tax purposes.3Internal Revenue Service. Rev. Proc. 2025-324Office of the Law Revision Counsel. 26 U.S. Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses The UNICAP rules capture indirect costs that most businesses don’t capitalize for financial reporting: a share of warehouse rent, depreciation on production equipment, property taxes, insurance, and certain administrative costs. For manufacturers the list extends to quality control, rework labor, and factory management. The tax inventory balance for a UNICAP filer is often higher than the GAAP balance because more cost is trapped in the asset. The accrual entry itself works the same way; the difference is which costs feed into it for tax reporting.
Interest costs get pulled into UNICAP only in narrow situations: property with a long useful life, an estimated production period over two years, or a production period over one year with costs exceeding $1 million.4Office of the Law Revision Counsel. 26 U.S. Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
From Accrual to Cost of Goods Sold
Once accrued, the inventory follows the normal path. It stays on the balance sheet at its accumulated cost until it sells. When it does, the cost moves to the income statement as cost of goods sold, matching the expense of the goods against the revenue they generated. The mechanics are the standard formula: beginning inventory plus net purchases, less ending inventory, equals cost of goods sold. Whatever you accrued at period end is part of that beginning or ending balance depending on which side of the cut-off it falls on.
A perpetual system handles this cleanly because every receipt, including accrued ones, updates the inventory subledger in real time. A periodic system relies on the physical count at period end to establish the ending balance. Either way, if the accrual is missing, the count and the books won’t agree, and the resulting adjustment will hit cost of goods sold in the wrong period.
Physical Counts Still Matter
Even with disciplined accrual entries and a perpetual system, book inventory must reconcile to a physical count at reasonable intervals. The IRS doesn’t set a specific frequency, but the requirement is that book and physical figures agree, and counts happen often enough to catch shrinkage, theft, and recording errors.1Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods A count is where a missed period-end accrual usually surfaces: the shelves show goods your ledger doesn’t.
Common Mistakes to Watch For
Three errors show up repeatedly. First, using physical arrival at the warehouse as the trigger instead of the transfer of title, which understates inventory on every FOB shipping point purchase in transit. Second, accruing consignment goods that don’t belong to you, which inflates both inventory and liabilities. Third, forgetting to reverse the accrual when the invoice arrives, so the same liability sits in two accounts until someone reconciles Goods Received Not Invoiced and finds the duplicate.
None of these is complicated on its own. They compound at period end when volume is high and closing deadlines are tight, which is exactly when auditors know to look.