Stock Reconciliation

Stock Reconciliation: Definition, Uses and Process

By Team TranZact | Published on Jan 19, 2023

Stock reconciliation helps the inventory count in your record books match with the warehouse stock count. Stock reconciliation is important not only to ensure your inventory records match with actual stocks but also to eliminate inventory inconsistencies.

Unsure of what a stock reconciliation process is and how it works? Here's a detailed guide for your understanding.

TranZact - Best Inventory Management Software

What Is Stock Reconciliation?

Stock reconciliation is the process of matching and synchronizing actual inventory counts in the store or warehouse with inventory records. Also known as physical inventory reconciliation, this process enables companies to reduce or eliminate any discrepancies in the inventory counts.

The stock reconciliation process is aimed to:

  1. Identify gaps in inventory levels and inventory movements on a day-to-day basis.
  2. Determine the exact value of existing inventory for accounting purposes.

Stock reconciliation is also used to balance the opening and closing stock levels, count obsolete or damaged inventory items - and identify the reason for the discrepancy in the inventory count.

Next, let's talk about the importance of inventory reconciliation for small enterprises.

Why Is Stock Reconciliation Important?

Even with regular inventory checks, small businesses can have a mismatch between their recorded and physical inventory count. This can happen due to a variety of reasons:

  1. Lack of adequate inventory administrative processes.
  2. Manual counting and other human mistakes.
  3. Loss or damage of the inventory on hand.

Owing to these reasons, the actual inventory stock in warehouses could be higher or lower than the count in the stock records

Here are some key benefits of inventory reconciliation for small businesses that must be considered:

  1. To align the reported stock count with the physical count for accurate inventory reports.
  2. To streamline inventory storage operations by identifying internal gaps causing the discrepancy.
  3. To improve the process of tracking inventory and preventing any theft or damage.
  4. Ensure that every type of inventory is recorded separately in the accounting books.
  5. Enhancing inventory optimization by avoiding shortages and overstocking scenarios.

How can small companies perform reconciliation in inventory? Let's shed some light on this with the next sections.

How to Do Stock Reconciliation?

Stock reconciliation does not mean simply changing a few numbers to match the inventory count. It involves a lot more.

Here are the key steps that will help you understand how inventory reconciliation works and how to implement it:

Count the physical inventory

The first step in stock reconciliation is to count the amount of physical inventory in your stores and warehouses. Typically, many businesses perform this activity before the end of a fiscal year or on a quarterly basis. When performing this step, one must ensure that there is no physical movement of stock that can disrupt the audit.

Make sure you accurately recount the number of items to avoid errors. The objective is to get the right inventory count before moving to the next step.

Check the physical inventory count with the records.

The next step is to check the count of physical inventory with the inventory records in your books. In this step, make sure you cross-check every stock item (with a serial or batch number) with the corresponding item mentioned in the inventory books. You must also check this inventory count with the quantity mentioned in the supplier invoices and your sales invoices.

During this process, check for each of these inventory-related discrepancies:

  1. Missing items or paperwork
  2. Any human error or wrong entry
  3. Miscalculations or any counting errors
  4. Unlisted items in the inventory records
  5. Outdated or discontinued stock items
  6. Scrap items or unusable items that you can sell

After identifying the problem, make sure you identify the root cause, as to why it occurred - and take remedial steps to prevent the problem from recurring.

Check for any discrepancies in your previous reconciliation

If you have previously performed inventory reconciliation, you may additionally want to look at those records for any discrepancies. This could explain the difference in the count found in the current reconciliation process.

Here are some of the activities you can perform:

  1. Look at all the inventory shipments or deliveries since the last reconciliation.
  2. Examine your previous sales records and deliveries for any miscalculations.
  3. Check your sales and shipment receipts.

If you are still unable to find the root cause of the discrepancy, it could be because of inventory theft or fraud, which needs to be investigated.

Reconcile inventory

After finding the discrepancies and their causes, the next step is to reconcile inventory in your inventory records with an effective inventory management system. Without this system, you may be required to update the inventory records in your accounting books manually. Additionally, you also need to complete any write-offs and financial reporting during this step.

You can create an inventory reconciliation statement that lists discrepancies and overrides the previous inventory records. An inventory management tool can also help you to make this statement.

Perform stock reconciliation consistently

For best results, you must perform stock reconciliation regularly, rather than at the end of the financial year only. Regular reconciliations can improve the accuracy of your recorded inventory, avoid discrepancies, and reduce inventory costs.

Schedule a stock reconciliation process regularly, depending on your business needs. Regular stock reconciliation can be time-consuming but can provide the following business benefits:

  1. To check the existing inventory management process for quality and consistency.
  2. To notify higher management of any discrepancies in inventory-related data.
  3. To provide managers with accurate data, which can help them decide how to grow or improve their inventory management functionality.

Next, let's discuss the most effective method to perform stock reconciliation.

Stock Reconciliation Methods

You must adopt an inventory and material reconciliation method depending on what works best for your company goals. This can be then evaluated yearly, monthly, or even weekly.

We've listed the following methods to help you reconcile your inventory:

Seasonal inventory checks

Based on seasonal demand, you can check your inventory before the peak seasons for your product categories. For example, suppose you are in the business of selling air-conditioners. In that case, you can perform inventory reconciliation in the spring season (before the onset of hot summers when there is peak demand). This method is efficient and cost-effective for small businesses or single-product companies.

Seasonal inventory checks help small businesses anticipate future demands. It also helps them to set the correct time and quantity for reordering items.

ABC method

This method involves conducting stock reconciliation based on the priority of sales volume and value. This means prioritizing those stock items first, that account for the maximum sales and revenue for the company.

Typically, stock items are divided into the following 3 categories:

CategoryStock percentageStock value %
Category A20%80%
Category B30%15%
Category C50%5%

In this method, items in Category A have the highest priority as it has the highest stock value (in percentage). This means you must prioritize stock reconciliation for Category A items first. Category C items have the lowest value, hence the least priority.

Now that we have understood the methods let's discuss the benefits of stock reconciliation in the next section.

Benefits of Stock Reconciliation

Regular stock reconciliation with an expert inventory reconciliation software provides multiple benefits to small businesses, as highlighted below:

Provides full visibility

With stock reconciliation, companies can have complete visibility into their inventory management. Decision-makers now have real-time access to accurate inventory reports.

Minimizes damage or theft

With regular reconciliation of your available stock, you can detect any loss or damage to your inventory. This helps in minimizing risks and business losses.

Prevents stockouts

Regular inventory counts ensure you never run out of stocks for sale or production. Stock levels are periodically updated, thus avoiding any stockouts.

Forecast demand

Stock reconciliation also helps businesses forecast demand by using historical inventory-related data.

Ensures business control

With regular stock reconciliation, business owners are assured of complete business overview and control. They can focus on activities to boost their business or production levels. Business executives can make confident, data-backed decisions with accurate data about stock levels and ongoing shipments.

Ace Inventory Reconciliation With TranZact

At TranZact, we have designed customized inventory reconciliation solutions that work exceptionally well for small manufacturing businesses. Our inventory management solutions offer auto stock valuation features, and real-time insights on inventory movements.

You can effortlessly update stock records digitally without time-consuming manual processes. Our stock reconciliation feature also equips you to add reconciliation statements after thorough checks to ensure your actual stocks and book records are perfectly balanced. Contact us to learn more about how we can help you grow.

FAQs on Stock Reconciliation

1. How is inventory reconciled?

Inventory is reconciled by comparing the inventory count in the accounting records with the actual count of the physical inventory in your warehouse and stores. This is followed by entering the correct count for adjustment in the inventory records.

2. How do you reconcile beginning and ending inventory?

To reconcile the beginning inventory, you need to add the value of the ending inventory (from the previous reconciliation process) to the cost of sold goods and deduct any purchases. To reconcile the ending inventory, you need to add the value of the beginning inventory to the purchases, and deduct the cost of any sold goods.

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TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.