In today's fast-paced business world, keeping correct inventory records is important. Inventory adjustments help make sure that the number of goods recorded matches the number physically present. These changes affect revenue, operational performance, and decision-making by identifying errors and improving financial reporting.
Understanding the importance of inventory changes and applying best practices can help businesses stay ahead of the competition and make educated strategic decisions. Let's look at the information inventory adjustments provide for efficient and successful inventory management.
What Is An Inventory Adjustment?
As part of the inventory adjustment process, the company adjusts the number of items or materials recorded in its inventory system to match the actual count of the items in the warehouse. It helps correct errors caused by theft, damage, or other issues.
Businesses that make these changes have accurate and up-to-date inventory records, which can increase operational efficiency, reduce losses, and give more trustworthy data for decision-making and financial reporting.
Why Are Inventory Adjustments Important?
Inventory adjustments are important as they let companies track changes not recorded officially while keeping in line with legal accounting rules.
These changes ensure that product pricing remains accurate, such as providing the cost of an item does not increase or decrease due to stock calculations. An accurate inventory analysis can help a company gain a clear picture of its overall financial health.
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Types Of Inventory Adjustments
A company's adjustment inventory can be adjusted in three ways:
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Decreasing Quantity: In this, a business adjusts the total value of an item when there is less stock than was first reported.
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Increasing Quantity: In this, a business modifies the overall price of an item because there is a greater quantity in stock than was originally recorded.
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Re-evaluation: When the amount of stock does not change, but management manually alters an item's cost and overall price.
How to Make an Inventory Adjustment
Here are a few simple steps to making an adjustment inventory:
1. Obtain Information
Calculate the amount of the company's starting inventory for the period under review. You can work with the accounting department to obtain the inventory adjustment journal entry and the data for these calculations.
Add the total value of all purchases for that period to your total inventory.
2. Determine the Cost of Products Sold
The basic formula for determining the cost of goods sold (COGS) is as follows:
COGS = beginning inventory + purchases - ending inventory
By adding the beginning inventory calculation to the total purchases and subtracting the final inventory, you can enter the values you obtained into this formula.
Based on the resulting figure, a company's costs are calculated.
Inventory Adjustment Examples
The examples of inventory adjustments are listed below:
Example 1: Seasonal Demand Fluctuation Adjustment by a Toy Maker
Seasonal demand changes are important for a toy maker. They stock up on supplies throughout the holiday season to meet the increased demand.
Suppose, they have Rs. 100,000 initial inventory at the start of the year. They sell Rs. 500,000 in toys annually and have an ending inventory of Rs. 120,000.
Seasonal fluctuations must be considered when analyzing actual performance and financial health. They make a seasonal demand variation adjustment to calculate the Cost of Goods Sold (COGS) correctly:
Rs. 100,000 of beginning inventory + Rs. 500,000 of total purchases - Rs. 120,000 of ending inventory = Rs. 480,000 COGS.
Accounting for seasonal demand changes gives the organization additional insight into the actual cost of items sold during the year. This change contributes to a more accurate view of the company's success and financial success throughout the year.
Example 2: Overstated Inventory by Computer Manufacturing
A computer manufacturer counts a batch of components twice, resulting in a Rs. 20,000 overestimations of ending inventory. Although the actual final inventory value is Rs. 100,000, the inventory system displays Rs. 120,000.
Now, the company must remove Rs. 20,000 from the recorded ending inventory value to correct the stock adjustment double entry to ensure accurate financial reporting.
Due to this modification, the correct amount of the Cost of Goods Sold (COGS) is Rs. 80,000.
Example 3: Understated Inventory by a Manufacturing Company
A manufacturing company's inventory system does not include a recent batch of raw materials. The value of the unrecorded materials is Rs. 10,000. As a result, the final inventory looks to be Rs. 10,000, a bit low, resulting in an incorrect Cost of Goods Sold (COGS) calculation.
To address this, the company must add Rs. 10,000 to the final inventory value to calculate COGS correctly and make sure financial reporting reflects the correct inventory levels.
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Tips for Making Inventory Adjustments
Here are some tips to help you make proper inventory adjustments:
1. Inventory Software
Use certified software applications to help with organizing, balancing, journal entries, and financial statement preparation, resulting in better inventory management and simple access to information. For example TranZact, NetSuite, Odoo, Zoho, etc.
2. Efficient Communication
Share adjustment updates with other departments to make sure inventory is managed smoothly. Consider using automated technologies to inform relevant teams.
3. Schedule Regular Spot Checks
Perform regular spot checks during the calculation period to find errors quickly and prepare an adjustment inventory questionnaire pdf for checkpoints, saving workload during final adjustments and avoiding inventory problems.
4. Analysis of Previous Errors
Analyze variants to avoid future problems. Implement additional paperwork, better communication methods, or employee training seminars to address possible inventory issues beforehand.
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Make Timely Inventory Adjustment With TranZact
Accurate inventory changes are important for keeping trustworthy financial records and managing inventory efficiently.
Indian SMEs can reduce inventory errors, improve decision-making, and improve their operations using TranZact's inventory management software, ultimately leading to increased profit and growth.
FAQs on Inventory Adjustment
1. What happens if inventory adjustments are incorrectly performed?
Incorrect inventory adjustments can result in inaccurate financial statements, false inventory calculations, and poor decision-making based on incorrect data. Overstocking or stockouts can occur due to too much or too little inventory, reducing sales and operational costs.
2. Inventory adjustments can help with financial reporting in what ways?
Accurate inventory changes make sure that the cost of goods sold (COGS) and ending inventory adjustment in journal entries are correct. It gives stakeholders, investors, and management better details into the company's financial health and performance.
3. Can Inventory adjustments be automated?
Many portions of the adjustment process can be automated with smart inventory management software. The software can automatically match inventory counts, apply adjustments, and provide updated reports, saving time and eliminating manual errors. Some software that will help you with the same are TranZact, Zoho, NetSuite, InFlow, and Fishbowl.
4. How often should inventory be adjusted?
The frequency with which inventory modifications are made is decided by the needs of the business and the quantity of inventory activity. Regular spot checks should be performed throughout the accounting period to find mistakes early on. Also, year-end physical counts are required to adjust the inventory correctly.
5. How should a physical inventory count be performed?
Follow these procedures to carry out a physical inventory count:
- To avoid disturbances, schedule the count during off-peak hours.
- Inventory should be divided into manageable pieces.
- To record correct counts, use barcode scanners or tracking sheets.
- Adjust the physical count to match the system records.
- Look into and fix any differences that are discovered.
6. Should inventory adjustments be made based on actual costs or the initial purchase price?
Inventory modifications should be made based on the actual cost rather than the purchase price. Using current market value allows accurate financial reporting and represents the actual value of on-hand inventories.
