A reliable stock taking procedure allows businesses to know its inventory count and value, not only informing decision-makers and driving operations but also ensuring accurate information is available to accountants, auditors and financial controllers who prepare annual reports, balance sheets and essential statements of earnings.
A stock take discrepancy occurs if the actual quantity of stock held by a business is different from the quantity shown in its inventory records. Such differences between actual and mistaken stock counts can present a real problem for businesses, potentially costing the bottom-line in lost sales, build-up of surplus stock, and customer dissatisfaction. Discrepancies revealed by a company’s stock taking procedure also have a direct effect on how a company values itself and its assets.
An overstated inventory record suggests that a company has more stock items in its stores than it actually has, whereas an understated inventory suggests the company has less in its stores than its actual stock count.
While stock take discrepancies can occur for a number reasons, including damage, human and/or procedural error, or theft and fraud, they are a normal part of business for almost any company that involves itself in stock management.
What is important is that a company implements a stock taking procedure whereby it regularly – and especially when a specific discrepancy has been identified – reconciles its inventory, comparing stock counts in its records to the actual amounts of stock held on warehouse shelves.
This will allow the company to work out why there is a difference between the believed and actual stock count, preventing future discrepancies of the same nature, and to make amendments to the records to reflect the accurate figures.
Why reconciliation is important
Accurate inventory records provide for efficient operations and allow accountants to correctly value a company’s inventory property.
Income statements, statements of retained earnings and balance sheets are financial documents essential to a company’s operations, and sometimes even required by law. They can only be prepared properly if inventory is valued accurately.
For example, on a company’s income statement, the cost of inventory sold is recorded as the Cost of Goods Sold (COGS). The COGS value directly affects a company’s net income, and also affects the balance of retained earnings on its statement of retained earnings – all of which go to the heart of the company’s accurate overall value.
The COGS is calculated based on cost of inventory sold and held at the end of each financial reporting period, which requires an accurate understanding of actual stock value.
If inventory is overstated, the COGS value is lowered. If inventory is understated, COGS value is artificially increased. A mistaken inventory count can make it look as though a company has done more or less business than it actually has, affecting both it’s current and future overall valuation.
Accuracy is valuable
The value of inventory must be computed accurately as it accounts for the majority of a company’s current assets and determines the amount of profits or losses that the company generates. A proper inventory reconciliation ensures that actual and recorded inventory amounts are the same at the end of each financial year, meaning no accounting issues come audit time!