Stock Adjustment

A shop's system shows 500 units, but a careful count finds 480, and the 20-unit difference may reflect damage, an unposted sale, a receiving mistake or a count error. Investigate before entering a loss, because simply forcing the system to equal the count can hide the cause.

Inventory reconciliation compares physical quantities with records and explains differences, and AccountingTools notes that a recount and checks for unrecorded transactions can be needed before a final adjustment. Record the item, location, date, quantity and reason for each change, with who checked and approved it; a reason code such as 'damage' should be supported by evidence, not used as a convenient catch-all.

Some adjustments correct quantity without changing total value, such as a unit found in the wrong bin that needs a location transfer or a misclassified product that needs reclassification rather than a write-off. A shortage can reduce inventory and recognise an expense or loss depending on policy and cause, while an unposted sale instead requires recording the sale and related cost.

The basic calculation is the physical quantity minus the recorded quantity, multiplied by unit cost, so 480 rather than 500 units at an illustrative $30 per unit gives negative $600. That is a useful estimate only if the units share the right recorded cost, which may not be the latest purchase price, because a business using weighted average or FIFO should follow its inventory accounting method.

Mixed lots, foreign currency and overhead can make a simple unit-cost multiplication inaccurate. A write-down is related but different, because the quantity may be correct while goods are obsolete or expected to sell for less than their carrying amount.

IAS 2 requires inventories to be measured at the lower of cost and net realisable value under IFRS, and net realisable value is the estimated selling price less estimated costs to complete and sell. A slow-moving product is not automatically worthless, so review sales history, condition and expected disposal route, and write off damaged or expired goods only when they have no recoverable value, documenting whether they were disposed of, returned to a supplier or sold at a discount so that the physical movement and accounting entry agree.

Counts can themselves be wrong, since a counter may miss a pallet, count a carton as one unit or count customer-owned goods as company stock, so repeat unusual counts and check units of measure before posting a material difference. Cut-off matters too, because goods shipped or received around the count date may be in transit or waiting to be entered, and ownership and timing must be confirmed so inventory is not counted twice or omitted entirely.

Set approval limits proportionate to the value and pattern of changes, so the person controlling stock cannot erase a large shortage without independent review, although smaller businesses can use owner approval and periodic reports. Watch trends by site, item and reason: one large adjustment may be a known process failure, while many small adjustments may reveal recurring waste or weak receiving controls, and differences alone do not prove theft.

Cycle counts can catch problems before a year-end stocktake if high-value or fast-moving goods are counted more often, and where an adjustment affects financial statements the audit trail should show original quantity, revised quantity, valuation, explanation and approval, with the inventory subledger reconciling to the general ledger. For owners, a stock adjustment is both a correction and a signal, so correct the records accurately and then ask whether the difference points to a preventable loss or a broken process.