During a leisurely Sunday drive, my husband, an engineer, and I found ourselves discussing the importance of reconciling inventory. For me, an accountant to the core, reconciling isn’t just a task—it’s a fundamental part of my training and something that feels inherently right. Whether it’s inventory, work in process, PO accrual, or bank accounts, these figures should align with the amounts in the general ledger.
In my mind, I could hear an engineer’s pragmatic voice saying, “It’s only off by 0.18%. Why is that a concern?” This sentiment was actually expressed by an engineer when we were reviewing an inventory reconciliation.
As an accountant, this almost made my blood boil. I wanted to shout, “BECAUSE IT HAS TO BE. THAT’S WHAT WE’RE TAUGHT!” But I took a deep breath, realizing that convincing an engineer, might be futile. I know from being married to one for over 30 years. Engineers often prioritize functionality and reasonableness, while we accountants strive for precision and balance.
Perhaps it’s our training or maybe just our nature (the age-old nature vs. nurture debate), but reconciling numbers is like solving a puzzle, with significant consequences. It’s my happy place. But how does reconciling inventory truly benefit a company? Here are my top seven reasons:
- Integrity of Financial Records: An incorrect inventory figure means at least one other account is also wrong due to the double-entry accounting system. This could affect expenses like inventory adjustments, cost of sales, or work in process, leading to multiple inaccuracies.
- Accurate Profitability Reporting: Incorrect inventory can mislead management about the company’s financial health, resulting in poor decision-making.
- Correct Gross Profit Calculation: Errors in the cost of sales can lead to incorrect gross profit reporting by part or customer. This might cause management to focus on unprofitable parts or customers, harming the company’s long-term profitability.
- Passing External Audits: Accurate inventory is essential for a favorable audit report. Auditors need to confirm that financial statements accurately represent the company’s financial position. Discrepancies in inventory could result in negative audit opinions which can have a negative impact on anyone who looks at the financial reports.
- Government Compliance: During a government audit, non-reconciliation of inventory accounts can lead to questions about the accuracy of financial reports. This could result in additional taxes or penalties, or worse, overpayment of taxes.
- Securing Financing: Banks often use inventory as collateral for loans. Overstated inventory might mean borrowing more than entitled, and failing to reconcile these figures could jeopardize the company’s reputation and financing.
- Staff Well-being: Ensuring accurate inventory records can reduce stress among the accounting staff. One of my clients recently admitted to losing sleep over unreconciled inventory. Once we resolved the discrepancies, they slept better.
I hope this gives you a sense of why reconciling inventory is so crucial and why it brings such satisfaction to accountants like me.
