In this article, we explore what inventory reconciliation is and some of its benefits. We also share our 7-step process on how to reconcile inventory. Read on to learn more.
Inventory reconciliation is the process of ensuring that the physical count of stock or inventory matches the numbers shown in an accounting system or records. In other words, it's a mechanism to verify that the quantities of products on the shelves align with what's documented in the business's books.
Example: At "BrightTech Electronics," the accounting system indicated they had 500 units of a particular gadget, but a physical count revealed only 485 on the shelves. Through inventory reconciliation, they identified the discrepancy and adjusted their records to ensure accuracy in their financial reporting and retain stakeholder trust.
Different methods can be employed to reconcile inventory. Here are the most common ones:
This is the most traditional method, where every item in the inventory is manually counted, and the result is then compared to the recorded figures.
Example: At "Books Galore," staff members closed the store for a day and manually counted every book on the shelves, then cross-referenced the totals with their electronic records to ensure alignment. The count revealed a minor discrepancy which was corrected to ensure the physical stock matched their recorded figures.
Instead of counting the entire inventory at once, businesses using this method count a subset of their inventory regularly. Over time, each section of inventory gets counted multiple times a year, ensuring continuous accuracy without the need to shut down operations.
Example: "Healthy Harvest Groceries" employs cycle counting by designating each week to count different sections of their store. For instance, the produce section is counted on the first week of the month, dairy in the second week, and so on to ensure each area is accounted for multiple times a year without disrupting daily operations.
Used mainly in the retail sector, this method estimates ending inventory based on the cost of goods sold and the gross margin. It's less precise than a physical count but is faster and can provide interim estimates.
Example: Using the retail method, "Fashion Forward Boutique" estimated their quarterly inventory levels by considering their total sales and their average profit margins. This provided them with a quick snapshot of their expected inventory without having to do a detailed count.
This estimates inventory based on the historical gross profit rate. Like the retail method, it provides quick estimates without the need for physical counts, though it's not as precise.
Example: "AutoParts Central," given their consistent sales pattern, estimated their inventory based on their historical gross profit rate. This allowed them to quickly gauge if their stock levels were in the expected range without going through an extensive counting process.
In this system, every time an item is sold, used, or received, the inventory records are updated in real time. Regular checks and balances are conducted to ensure the system's accuracy.
Example: At "Tech Haven," each sale of a gadget immediately updates the inventory records in their system. This real-time tracking, paired with periodic manual counts, ensures that their stock levels are always accurate and discrepancies are quickly addressed.
Inventory reconciliation offers a multitude of benefits. Some of these include:
Ensuring that the recorded inventory matches the physical stock ensures the accuracy of financial statements, which is vital for investors, creditors, and internal decision-making.
Regular inventory reconciliation can act as a deterrent for internal theft and can quickly pinpoint discrepancies due to fraud.
By knowing exactly what's on hand, businesses can avoid over-purchasing or under-purchasing inventory, leading to better cash flow management.
Accurate inventory figures help businesses make informed decisions about production, sales, and distribution, optimizing the supply chain.
Having a correct understanding of inventory levels ensures that businesses can fulfill customer orders promptly, leading to increased customer satisfaction.
Use our 5-step process to effectively reconcile inventory. Simply follow the steps below:
Decide whether you'll conduct full inventory counts annually, semi-annually, or use a cycle counting method.
Example: "Bean Brew Café" chose to conduct a full inventory count of their coffee beans and supplies semi-annually, while cycle counting their baked goods daily due to their shorter shelf life.
Collect all relevant documents such as purchase orders, sales receipts, and previous inventory counts.
Example: Before their annual inventory check, "Sunny Sports Store" compiled a folder containing all purchase orders of sports gear, sales receipts, and the results of their last inventory count to have a reference point.
If doing a physical count, ensure that the process is organized. This may involve shutting down operations for a short period. For other methods, ensure that the right formulas and historical data are available.
Example: "Crafty Crafts Shop" closed their store for half a day to conduct a thorough physical count of every craft item on their shelves. They also set up a dedicated space to organize items, and had a separate team checking historical data and formulas for items sold online.
After the count, compare the figures to the records in your accounting system.
Example: After counting every piece of hardware, "Tech Titan" realized they had 980 units of a specific device in hand, even though their accounting system showed 1,000 units.
Any differences between the physical count and the system's records should be investigated. This could be due to theft, damage, clerical errors, or other reasons.
Example: Upon noticing a difference of 50 designer shirts between their physical stock and records, "Elegance Fashion Store" launched an internal review to determine if the shirts were stolen, misplaced, damaged, or if it was simply a data entry error.
Once the reasons for discrepancies are found, adjust the records accordingly.
Example: "Lush Green Nursery" found they had 15 more ornamental plants than their system indicated. After confirming the plants were extra stock received by mistake, they updated their records to reflect the accurate number.
Based on the discrepancies found, implement measures to prevent such issues in the future. This could involve better security, improved software, or staff training.
Example: "Crystal Jewels" discovered that a clerical error led to a miscount of certain jewelry items. In response, they decided to invest in better inventory software "InventoryMaster Pro" and conducted training sessions for their staff to ensure accurate data entry.
Stellar Widgets Inc. is a company that manufactures and sells specialized widgets. They have a warehouse in which they store raw materials and finished products. Here’s how they employed our inventory reconciliation process:
Stellar Widgets Inc. conducts a full inventory count semi-annually. Additionally, they have implemented cycle counting for specific high-value items every quarter to ensure consistent accuracy.
Before the semi-annual count, the inventory manager gathers all purchase orders from the past six months, sales receipts, and the report from the previous inventory count.
The company shuts down operations for one full day. The inventory team, equipped with handheld scanners and tally sheets, begins counting items, starting from the raw materials section to the finished products.
Once the count is completed, the figures are compared to the records in their accounting software. For instance, the software indicated 10,000 finished widgets, but the physical count showed only 9,950.
The 50-widget discrepancy needs investigation. The inventory manager reviews recent sales receipts, checks for returned goods that may not have been recorded, and consults with the warehouse staff to identify potential damages or losses.
After investigation, it was discovered that 30 widgets were damaged during transport within the warehouse, and 20 widgets were samples sent out for quality checks and hadn't been documented. The records in the software are adjusted to reflect the physical count: 9,950 widgets.
To address the discovered discrepancies, Stellar Widgets Inc. implements new measures. They decided to improve the handling procedures to reduce transport damage and establish a dedicated log for all sample items sent out for checks to ensure they're tracked accurately.
We hope our article has now left you with a better understanding of what inventory reconciliation is and the process of reconciling inventory to ensure a company operates efficiently.
If you enjoyed this article, you might also like our article to determine if merchandise inventory is a debit or credit or our article on inventory on hand.
