Bookkeeping

Year-End Inventory Count in Canada: Cost of Goods Sold Guide for Small Businesses

A practical year-end inventory checklist for Canadian retailers, restaurants and product-based businesses, including a simple cost of goods sold example and CRA record-keeping tips.

If your Canadian small business sells products, your year-end inventory count is more than a stockroom task. It helps determine your cost of goods sold (COGS), the value of goods still on hand and the accuracy of your financial statements and tax records. Missing or double-counted stock can make your reported profit misleading.

This plain-language guide explains how to prepare a year-end inventory count, calculate a simple COGS figure and keep evidence for your bookkeeper or accountant. It is general Canadian tax and bookkeeping education, not individualized tax advice.

What is year-end inventory?

Inventory generally includes goods your business owns and holds for sale, along with relevant materials and work in progress where applicable. For a convenience store, it may be packaged products on the shelves and in storage. For a restaurant, it may include food ingredients and beverages. For an online seller, it may include unsold products stored at home or in a fulfilment warehouse.

The important distinction is ownership, not merely physical location. Goods your business owns but keeps at a third-party warehouse may still belong in its inventory. Goods held on consignment for someone else may not. Confirm ownership and the terms of unusual arrangements before counting.

Why the inventory count affects taxable business income

Buying products does not necessarily mean their full purchase cost becomes an expense immediately. Unsold goods generally remain in closing inventory and affect the cost of goods sold calculation. This helps match the cost of products to the period in which they are sold.

A simplified calculation for a product-based business is:

Opening inventory + purchases and eligible direct costs − closing inventory = cost of goods sold.

Depending on your operations and accounting method, freight-in, production costs, returns, discounts and work in progress may require separate treatment. A business with manufacturing activity may need a more detailed calculation than a small reseller.

Cost of goods sold example

Imagine a small Canadian retailer with these figures for its fiscal year:

The business did not simply deduct all $72,000 of purchases as COGS. The closing stock value matters. These figures are illustrative and assume all relevant adjustments have already been included.

Seven steps for an accurate year-end inventory count

1. Choose a cut-off date. Plan the count at your fiscal year-end or document movements between the count date and year-end so the closing balance is accurate.
2. Organize stock by location. Include shelves, back rooms, vehicles, storage lockers and third-party locations where your business owns goods.
3. Record quantities by item. Use an SKU or clear description, unit of measure, location and count sheet. Avoid vague entries such as “miscellaneous products.”
4. Separate damaged, obsolete or expired items. Record the condition, quantities and supporting evidence rather than deleting them from the count without explanation.
5. Confirm ownership. Identify customer-owned goods, supplier consignment stock, returns in transit and goods your business owns at other locations.
6. Check purchase and sales cut-offs. Review goods received near year-end, supplier invoices, returns, shipments and sales to avoid counting the same stock twice or missing it entirely.
7. Reconcile to your books. Compare the count and valuation to your inventory ledger, investigate differences and document approved adjustments.

How should you value closing inventory for Canadian taxes?

Counting units is only half the work. You also need a supportable value for each inventory item or category. Canadian income-tax inventory valuation rules can involve cost and fair market value, with specific permitted methods and exceptions. The appropriate method depends on the inventory and circumstances. Avoid switching methods simply to create a preferred tax result; discuss material valuation changes with your accountant and consult current CRA guidance.

Keep purchase invoices, supplier credits, shipping documents, count sheets, valuation workings and evidence of any price reductions or damaged stock. A sale price is not automatically the same as an inventory cost.

What about damaged, expired or destroyed inventory?

Retailers, restaurants and salons may face expired products, broken items, spoilage or obsolete stock. These issues can affect inventory valuation or business expenses, but a write-off is not automatic just because an item is old or slow-moving. Keep a dated list of affected products, quantities, original costs, photographs when practical and records of disposal or destruction. Apply the appropriate accounting and tax treatment to the facts.

If stock was lost to theft, fire or another unusual event, retain incident reports, insurance correspondence and any recovery details. Insurance proceeds may affect the accounting and tax result.

GST/HST and inventory purchases

For a GST/HST registrant, recoverable input tax credits are generally tracked separately rather than treated as part of the net cost of eligible inventory purchases. If the GST/HST is not recoverable, the treatment can differ. Verify the invoice details and the business's ITC eligibility; not every purchase qualifies for a full credit. Sales tax reporting and income-tax inventory valuation are related bookkeeping tasks but are not the same calculation.

Common inventory bookkeeping mistakes

• Recording all stock purchases as an expense without considering unsold closing inventory.
• Leaving products at a warehouse or marketplace fulfilment centre out of the count.
• Including goods owned by a supplier or customer.
• Counting a returned or in-transit item twice.
• Using retail selling prices as if they were inventory costs.
• Writing off expired goods without quantities, dates or disposal evidence.
• Failing to reconcile the year-end count to the bookkeeping system.

Simple year-end inventory worksheet

For each item, record: SKU/description, location, unit, quantity counted, unit cost or supported valuation, extended value, condition, ownership notes and count date. Add a review column for adjustments and a sign-off from the person who checked the count. Save the original count sheets as well as the final summary.

Keep inventory support with your business tax records. CRA generally requires businesses to retain records for six years from the end of the last tax year to which they relate, with exceptions and special circumstances. Check the CRA rules before destroying records.

When should you ask for bookkeeping help?

Consider help if your inventory system does not match physical stock, you have large amounts of obsolete products, you sell through several channels, or you are unsure how to handle work in progress, consignments or GST/HST. Correcting the records before filing is usually easier than explaining unexplained inventory changes later.

Get your year-end records tax-ready with TiKi Tax

TiKi Tax helps Canadian self-employed people and small businesses organize receipts, reconcile bookkeeping, review expenses and prepare tax-ready records. If your inventory, purchases or cost of goods sold do not match, we can help you organize the supporting information for review.

Explore TiKi Tax or visit TiKi Tax services to learn more about bookkeeping and tax preparation support.

Educational information only. Tax treatment depends on the business's facts, accounting methods and current CRA rules.

Official sources

• Official CRA source 1
• Official CRA source 2