Inventory Management – Physical to Book Value

Planning, Tracking, and Accounting for Inventory Control Accuracy

Nov 10, 2009

Matching the physical inventory to the accounting general ledger may seem like a difficult task. Learn easy methods of inventory value control and GL management.

Inventory is often an entrepreneur’s biggest investment in the business. A lot of owner’s equity can be associated with inventory. That’s why proper inventory management is important. The business owner should always be aware of the value of this important asset. Often mistakes are made that can affect the perpetual inventory as well as the general ledger value of inventory.

Errors That Affect Inventory Accuracy

Some of the errors that are made during the course of daily operating activities can have a profound effect on inventory accuracy. Errors can be made receiving, selling, ordering and posting to the journals and general ledgers. There could be a discrepancy between inventory and cost of goods sold. Some examples of typical errors that can occur are:

These are just some generalities. Depending on the type of business there can be many more issues that can affect inventory accuracy. Performing periodic physical inventory counts can help minimize some errors. Physical counts are also important to get the real inventory value. To help manage inventory, matching the physical value to the general ledger values helps ensure that errors are minimized to protect asset investment.

Reconciling Physical Inventory to the General Ledger Balance

The actual real time physical value of inventory seldom matches the accounting general ledger amount. This imbalance is actually normal. The reasons for this imbalance can vary depending on the business. For example a product might be receipted into a perpetual inventory system, but the invoice may not be posted to the general ledger for a few days. Merchandise that’s in transit or work in process can be some other reasons for an imbalance.

The best practice is to reconcile at the end of each month. In order to match the physical to the general ledger, the business must be frozen in time. Financial transactions, as well as inventory transactions that create delays in posting to the GL must then be considered. A template should then be created to make adjustments so that the physical inventory and GL accounts can be reconciled.

As an example of a template, let’s use an auto parts store that also repairs vehicles. Some of the variations that are created are evident by the sample template. The work-in-process is parts inventory that are put on vehicles, deducted from the perpetual inventory, but won’t post to the GL until they’re paid for. The supplier charges the core values in this example, but their value is not included on the perpetual inventory.

The $212,000 should match the general ledger account balance in this example. If there is a wide variation, further analysis should be undertaken to determine why the discrepancy occurred.

Besides performing a yearly physical count, the inventory should be routinely checked to ensure its accuracy. Performing the reconciliation as a monthly routine is also important for proper inventory management. The combination of an accurate physical inventory and correct general ledger balance is vital for maximizing profitability.

The copyright of the article Inventory Management – Physical to Book Value in Accounting is owned by James Clausen. Permission to republish Inventory Management – Physical to Book Value in print or online must be granted by the author in writing.