University of Rochester

Office of University Audit

Inventory Controls

This page is designed to educate the UR Community about proper inventory controls and physical inventory to ledger account reconciliation methods.

Inventory best practices that you should follow:

Objective

A clearly defined objective for conducting a physical inventory for your department must be established. The purpose of the inventory is to adjust your ledger account to reflect the balance of the physical inventory count completed and extended pricing and to reconcile the variances.

Planning

  1. The key to a successful inventory is the quality of the planning effort. Your planning should include when and who will conduct the inventory and how the counts will be taken. The complete process should be flowcharted for direction for future inventories. Provide instructions to the count team in advance of the inventory.
  2. Attempt to reduce the inventory to a low level. This can be accomplished by reducing the amount of items ordered prior to the physical inventory and disposing of obsolete and damaged items prior to the count. Counting the inventory at the end of the month will reduce the number of reconciling items between the general ledger balance and the inventory detail.
  3. Items to be counted should be physically arranged to facilitate counting.

Procedures

  1. Include in inventory—items that are purchased for resale to: individuals, other departments, or within your department.
  2. Exclude from inventory—office supplies and furniture, equipment, and obsolete items which are no longer able to be sold (see below).
  3. Items should not be moved or sold when physical inventory is being conducted.
  4. Items should be counted in a systematic, consistent manner (left to right, top to bottom) with some way of indicating that the items have already been counted like tags or stickers.
  5. Inventory sheets should contain the location, room description, counter's initials, etc.
  6. Two member count teams should be used for accuracy and verification. One person in the department should be assigned responsibility for the inventory.
  7. The procedures for recording quantities of inventory should be adequate for subsequent pricing of the inventory items.

Sales, shipping and receiving cut-offs

Proper sales and receiving cut offs are required to ensure that the accounting records supporting transactions are consistent with the physical goods being counted. For example:

  1. The last day of recording sales and receipts should be agreed upon in the planning stage. Your accounting staff should be asked to provide all inventory related transactions as of the inventory date.
  2. Sales during the inventory count should not be permitted.
  3. Items received during the counting should be set aside and not counted in inventory.

Obsolete items

Items in inventory must be salable or usable. Damaged goods and items with zero value are excluded. Slow moving items should be valued at their market value if it is less than original cost.

Pricing

Pricing is as important as the counting. The value of the inventory that will be reflected in the ledger is the result of actual quantities multiplied by appropriate prices. Adequate documentation supporting the pricing used should be retained with the inventory records. The inventory should be priced at the lower of the item's cost or the market value.

Reconciliation example

I. General Information

    
Department No. XXXXX  
General Ledger Number 0-XXXXX  
Account Name My Account  
     
Explanation of Items held in inventory:    
This and that, stuff    
     

II. Actual Physical Count of Inventory from extended totals

   7,000
 of the inventory count/pricing sheets    
     

III. General Ledger Inventory

    
Calendar month of ledger Jan-01  
     
Subcode Description Amount
1400 Purchases 24,342.13
1410 Withdrawals 16,714.03
Total inventory balance   7,628.10
     

IV. Reconciliation

    
Items purchased (included in physical count) but not recorded on ledger at date of inventory count   357.97
Withdrawals (sales) not recorded on ledger at date of inventory count   (51.52)
Other adjustments to inventory (i.e. obsolete items)   (150.00)
Adjusted Ledger Balance   7,784.55
Variance between physical count and adjusted ledger   (784.55)
     

V. Adjusting journal entries

    
     
Debit: 2-XXXXX-2990  784.55  
Credit: 0-XXXXX-1400    784.55
To adjust the general ledger inventory amount to the actual physical count    
     
Debit: 0-XXXXX-1401  16,714.03  
Credit: 0-XXXXX-1400   16,714.03 
To collapse subcodes for year end    
     

Variations that may exist for your inventory

  1. Multiple 1400 series subcodes used for individual product lines. Also, be sure that you do not have inventory in subodes other than the 1400 series.
  2. A periodic inventory system would not include the withdrawals subcode and the collapsing entry in the reconciliation above.

Record retention

Support for the inventory counts (tags, sheets) and the inventory pricing (price lists, worksheets) should be retained in accordance with the University's record retention policy.

Your reconciliation and adjusting journal entry requests should be sent to General Accounting, c/o University Finance, Towne House Suite 260.