How to do Inventory Reconciliation

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{{company_name}}

{{company_address}}

Phone: {{phone}}

Email: {{email}}

Website: {{website}}

1. Purpose of Inventory Reconciliation

This procedure details the steps for reconciling physical inventory counts with accounting records to ensure accuracy, identify discrepancies, and maintain reliable financial statements.

Regular inventory reconciliation is critical for effective stock management, loss prevention, and accurate cost of goods sold calculations.

2. Scope

This procedure applies to all inventory items held by {{company_name}} across all storage locations, including warehouses, retail outlets, and transit points.

It covers both raw materials, work-in-progress, and finished goods.

3. Frequency of Reconciliation

Inventory reconciliation will be performed {{frequency_of_reconciliation}} (e.g., weekly, monthly, quarterly, annually).

Ad hoc reconciliations may be conducted as required, for instance, after significant stock movements, discovery of discrepancies, or upon request from management or auditors.

4. Preparation for Reconciliation

Before commencing reconciliation, ensure the following are completed:

All inventory movements (receipts, issues, transfers, sales) up to the reconciliation date have been recorded.

All relevant documentation (purchase orders, delivery notes, sales invoices, internal transfer documents) is readily available.

Physical inventory counts have been completed and verified by at least two independent personnel.

A freeze has been placed on all inventory movements during the counting period, if applicable.

5. Reconciliation Procedure

Compare the physical count records against the inventory ledgers/system records (e.g., stock cards, ERP system).

Identify and document all discrepancies, noting the item code, description, physical count, system quantity, and the variance (overage or shortage).

Investigate the root cause of each discrepancy. Common causes include:

- Data entry errors

- Unrecorded inventory movements (e.g., unposted receipts or issues)

- Lost or damaged stock

- Theft

- Measurement errors during counting

For each discrepancy, gather supporting evidence (e.g., missing delivery notes, sales returns, damaged goods reports).

Propose adjustments to the inventory records for approval.

6. Authorisation and Adjustment

All proposed inventory adjustments (increases or decreases) must be reviewed and approved by {{authorised_personnel_title}}.

Approved adjustments will be recorded in the inventory system by {{person_responsible_for_adjustments}}.

A journal entry will be passed to reflect the financial impact of the adjustment in the general ledger (e.g., debit/credit Inventory, debit/credit Cost of Goods Sold/Inventory Shrinkage Expense).

Documentation supporting the adjustment must be retained for audit purposes.

7. Reporting and Follow-up

A summary report of the inventory reconciliation, including a list of discrepancies, their causes, and the adjustments made, will be prepared.

This report will be submitted to {{management_reporting_recipients}} by {{reporting_deadline}}.

Management will review the report and implement corrective actions to prevent recurrence of identified issues (e.g., staff training, process improvements, system enhancements).

8. Signature Block

Prepared by: ________________________

Date: {{current_date}}

Reviewed by: ________________________

Date: {{current_date}}

Approved by: ________________________

Date: {{current_date}}