What is An Inventory Reconciliation And How to Do It

What is An Inventory Reconciliation And How to Do It

Inventory management is regarded as an integral aspect of the business process in any corporation. 

The major reason for its significance is that inventory is linked to working capital and productivity. 

The production process may only improve if there is sufficient stock in the warehouse, and the production process may suffer. 

Both circumstances are concerning for a firm, whether there is a lack of inventory or surplus goods in the warehouse.

Before starting with anything, let us know something about the settlement. 

Knowing about settlement

There is no standard way to make changes to your account. However, generally accepted accounting rules (GAAP) demand double-entry bookkeeping (transactions are recorded twice in the general ledger) and are the most commonly utilized instrument for modifications. 

Double-entry accounting is a simple method for matching accounts and identifying problems from both sides of a transaction. 

Each accounting entry is posted to two accounts, a credit account and a debit account, under the double-entry bookkeeping method frequently employed by enterprises. 

One account is debited, and the other account is credited. When a corporation makes a sale, it debits cash or deferred revenue (balance sheet) and credits revenue (income statement).

What does Reconciliation mean?

So, back to our topic Inventory Conciliation, Conciliation often refers to control. Hence, we can say that Inventory Conciliation means Inventory Control.

Inventory control extends much beyond just counting available goods. A lot of stock management data must be validated—for instance, the assets' condition or the financial accounts' dependability.

This is not a procedure that can be completed in a vacuum. Inventory management gets more complicated when a corporation has many sites. 

It is critical to regularly reconcile and confirm our physical inventory against our data records and accounting data.

This is where a solution like Especia comes in handy to ensure that the procedures are carried out appropriately. 

If you have to complete inventory validations at the end of the year, on a monthly or quarterly basis, the task will be time-consuming and difficult.

What is Inventory reconciliation?

Inventory reconciliation is the process of comparing your stock records to what you have in your shop. 

This method, in addition to counting goods and updating your records, allows you to identify and fix stock inconsistencies.

In this piece, we'll look at the procedures involved in stock reconciliation and some ideas to make the work easier.

Why is Inventory reconciliation important?

Let me ask you something. How accurate are your inventory records? As a retail business owner, your inventory is always changing. 

It's almost certain that your most recent inventory data don't match your real physical inventory with 100 per cent accuracy.

That is why you must regularly reconcile your inventory data against your physical goods. 

This allows you to discover the source of inconsistencies, optimize your systems, and avoid loss due to theft.

Even for a tiny organization, verifying inventory data is a tremendous undertaking. 

Most businesses shut down for many hours to do inventory reconciliation, missing out on sales opportunities they may have had otherwise.

This includes the reconciliation of stocks, too; reconciliation of stocks is nothing but the evaluation of materials periodically. They both are the same thing.

If you are thinking about how to reconcile inventory? Need not worry; we got you everything that you need to know. The following paragraphs will give a lot of clarity.

The following benefits of inventory reconciliation should be emphasized, among others

 -Detect physical asset losses, damage, and depreciation.

-Stockpile assets that are no longer needed.

-Incorporate data that reflects the reality of your assets.

-Have up-to-date facts for making decisions.

-Adhere to legal requirements requiring businesses to register inventories.

How to reconcile inventory?

To reconcile inventory, compare the inventory counts in the company's records to the actual numbers on the warehouse shelves, determine why the two amounts disagree, and then modify the records to reflect this analysis. 

Inventory reconciliation is an important component of cycle counting because it allows the warehouse personnel to update the accuracy of its inventory data constantly. 

Accurate inventory records are required to guarantee that replacement products are purchased on time, inventory is accurately priced, and parts are accessible for sale or manufacturing when needed. 

Inventory reconciliation is also required to confirm that the real and reported inventory levels are the same at the end of the year.

Inventory reconciliation is complex, like adjusting the book balance to match the physical count

There are other reasons why there's a difference in the two numbers that cannot be corrected with such an adjustment. So, follow all of the steps mentioned below.

Recount the inventory

Someone may have tallied the inventory wrongly. If so, have it counted again by a different individual (since the first counter could make the same counting mistake a second time). 

Furthermore, if the physical count looks to be much lower than the book balance, there is probably additional inventory at a secondary location; therefore, seek it. Recounting is the most likely cause of a variation; therefore, prioritize this step.

Match up the units to be measured.

Are the measurement units for the count and the book balance the same? One may be in single units, while the other could be in dozens, boxes, pounds, or kilograms. 

If you've previously done a recount and there's still an order-of-magnitude discrepancy, the problem is most likely the units of measurement.

Verify the part number

It's conceivable that you need to understand the item's part number on the shelf or that you're assuming its identification since there isn't one. 

If this is the case, seek a second view from an experienced warehouse employee or compare the item to the descriptions in the item master records. 

Another possibility is to seek another item with a unit count variation in the other direction - this might be the part number you're looking for.

Look for missing paperwork.

This is a significant cause of inventory reconciliation problems. Because a transaction has occurred, but no one has yet reported it, the unit tally in the inventory system may be erroneous. 

This is a huge problem for cycle trackers, who may have to search for unentered papers of this type before they feel safe changing inventory records. 

Other instances include receipts that have not yet been recorded (resulting in an incorrect inventory record) and issuances from the warehousing to the production area that have not yet been processed (so the inventory record is too high).

Examine Scrap

Scrap may occur anywhere in a firm (particularly in manufacturing), and employees may easily neglect its correct recording in inventory records. 

This is a possible explanation if you notice a small difference in which the inventory records are consistently higher than the physical count.

Investigate possible customer ownership.

If you have no record of an inventory item in your accounting records, it might be because the firm does not own it - a customer does. 

This is especially prevalent when a corporation redesigns or improves its products for its customers.

Examine Potential Supplier Ownership

To follow up on the previous point, it is conceivable that you have things in stock that are on consignment from a supplier and so owned by the provider. 

This is particularly frequent in retail settings and uncommon elsewhere.

Examine Backflushing Records

Suppose your organization employs backflushing to change inventory records (where inventory is relieved depending on the number of completed goods produced). 

In that case, the bill of materials and finished goods production statistics must be in great shape, or the reconciliation procedure will be difficult. 

Backflushing is not advised unless your production record-keeping is excellent.

Accept the Difference

You really don't have an option but to change the inventory record to reflect the physical count if all other types of investigation are unsuccessful. 

When in doubt, the physical count is accurate; it's likely that some other inaccuracy may later be discovered that explains the disparity. However, for the time being, you cannot leave a variance.

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Reconciliation of stocks periodically is necessary to maintain a tight ship when it comes to inventory. Otherwise, you won't be able to handle inconsistencies or problems like shrinking efficiently.

Consider this: if you only perform stock counts once a year, your inventory report will have inconsistencies from the previous year, making it challenging for you to identify the underlying reasons for your inventory problems.

The answer? Make the process of reconciling your inventory routine. If you're cycle counting, you must make sure that you repeat the procedure continuously. On the other hand, if you like performing complete inventory counts, make sure to do it at least once every three months or once a month.

FAQs Related Inventory Reconciliation

1. What does reconciliation mean?

Reconciliation is a method of accounting that aims to check units of records regularly, both within and outside, to make sure the numbers are correct and consistent.

2. Why should you reconcile your account?

Reconciling your debts is important because it makes it easier to spot any errors, fraud, or discrepancies in your accounting records that might seriously impact your business's ability to make money. A terrific business exercise that might help a firm succeed is reconciliation.

3. What is the reconciliation process?

Reconciliation doesn't always need to be done in a particular way. Still, in general, it entails comparing your internal debts to your external debts, as well as reviewing bills and deposits, checking bank statements for all cash outflows and inflows, noting fees for which you don't have receipts, and ensuring that all debits match up with credits and vice versa.

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