In today’s business environment, inventory adjustment is an integral part of any successful business model. Without proper inventory adjustment, businesses can experience losses due to overstocking, out of stock items and/or inaccurate pricing. Proper inventory adjustment can help businesses remain competitive, reduce costs, and improve customer satisfaction. Furthermore, proper inventory adjustments can help ensure that businesses have the right amount of stock on hand, at the right time, and at the right price.
In this blog post, we will discuss the importance of inventory adjustment, the benefits of proper inventory management, and the strategies to help businesses adjust their inventory accordingly. We will also look at some of the common pitfalls of inventory management to help businesses avoid them. We will also look at some of the best practices for inventory management, including how to use technology to automate and streamline the process. Finally, we will discuss how inventory adjustment can help businesses improve customer experience, maximize profits, and drive long-term success.
Why are inventory adjustments important?
Inventory adjustments are crucial because they allow your business to reflect changes that may not have been captured in official records while also upholding ethical accounting procedures. These adjustments ensure that product prices are accurate, preventing price increases or decreases caused by incorrect calculations of an item’s stock, for example. Your business can have a proper view of gross and net profits, income statements, and the overall health of the company with the aid of an accurate inventory stock representation.
Calculating inventory adjustments can also help calculate gross profits. The cost of goods sold (COGS) includes the costs and labor involved in selling inventory over a predetermined period of time. After that, you would put this on an income statement and use it to determine the gross profit of your business.
What is an inventory adjustment?
An increase or decrease in a company’s inventory to account for theft, damaged goods, loss, or other mistakes is known as an inventory adjustment. Periodic accounting entries or annual inventory counts can sometimes reveal these changes to businesses. In addition to sales, other sources for inventory adjustments include:
Inventory adjustments typically include information on which product is missing, its cost, and the number of units a company lost. When finalizing records for the current year, your accounting team may use these adjustments to compare your beginning inventory to your ending inventory.
How to make an inventory adjustment
The following is the formula for determining the cost of goods sold:
Cost of goods sold (COGS) is calculated as beginning inventory purchases minus ending inventory.
Here’s how to calculate your own inventory adjustments using this formula:
Types of inventory adjustments
A business may make one of three different types of inventory adjustments:
Inventory adjustment examples
Here are a few examples of the different inventory adjustments:
Accurate inventory
At the start of the year, a cosmetics company has $5,000 in initial inventory. Their annual sales total is $5,000, and their total ending inventory is $5,000. This indicates that the business has a precise record of its gross and net profits, income statements, and a general understanding of its state of affairs. This calculation would look like this:
Beginning inventory of $5,000, total purchases of $5,000, minus ending inventory of $5,000, equals $5,000 (COGS).
Understated inventory
A grocery store chain has $40,000 of beginning inventory. Their total outgoing inventory is $35,000, and their total outgoing purchase is $40,000. This demonstrates that ending inventory has been understated by $5,000, and management may need to raise prices by $5,000 to make up for lost inventory. The calculation for this would be:
Beginning inventory of $40,000 less ending inventory of $35,000 results in a cost of goods sold (COGS) of $45,000.
Overstated inventory
An $8000 initial stock purchase and an $8000 total purchase amount are made by a shoe retailer. Their ending inventory is $8,500, indicating that the final inventory amount is overstated by $500. This means that the business might have to lower the cost of goods by $500 to offset the extra inventory in their books. The calculation looks like this:
Beginning inventory of $8,000, total purchases of $8,000, and ending inventory of $8,500 result in COGS of $7,500.
Tips for making inventory adjustments
Here are some pointers to assist you in making precise inventory adjustments:
Inventory Adjustment Techniques | Odoo Inventory
FAQ
How do you calculate inventory adjustment?
Subtract the total of your beginning inventory and all of your purchases from the total of your final inventory. You can determine whether your inventory is overstated or understated in your records by looking at this number, which is the cost of goods sold.
What causes inventory adjustments?
There are three possible reasons to create inventory adjustments. The item’s value, quantity, or both are incorrect, or the item’s value and quantity are both incorrect.
What are the two kinds of inventory adjustments?
- Stock on Hand: There is an increase or decrease in the amount of stock, or salable stock.
- Unavailable Inventory: While the overall amount of inventory does not change, the amount of unavailable or unsalable inventory does.
What is inventory cost adjustment?
A purchase invoice cost adjustment is used to increase or decrease the value of the items you receive for your inventory. In order to make a cost adjustment, you typically need to have already created an inventory receipt and received the product from the supplier.
