Jun 27, 2012

Inventory to GL Reconciliation Challenges

I am not able to reconcile Inventory Balances to the Inventory Account Balances in GL, bemoans a frustrated accountant, who is on ERP. So what could be the problem?

This accountant is on Standard costing. So let us try to answer the question.

First the basics. In standard costing the cost of the inventory item is fixed at the beginning of the accounting period. All the inventory transactions in the period takes place at standard cost.

Let us look at the accounting entries while purchasing an item in the standard costing environment.

Data: Standard cost: 100, Purchase Price: 150

1. On receiving: Receiving Inspection A/c Debit: 150, Receiving Accrual A/c Credit: 150
2. On Delivering to inventory: Inventory A/c Debit: 100, Purchase Price Variance A/c Debit: 50, Receiving Inspection A/c Credit: 150 (In this step, Inventory is received at standard cost and receiving inspection account is netted off. The difference between the receiving inspection account value and the standard cost is transferred to the purchase price variance. This means that at the end of this step the Receiving Inspection Account should have a zero balance. This also means that any balance in Receiving inspection will be due to Items under inspection)
3. On Invoice to Receipt Matching: Receiving Accrual A/c Debit: 150, Liability A/c Credit: 150 (Receiving Accrual is netted off. This means that any balance in Receiving accrual account is due to Material delivered and accepted but not invoiced.)
4. On payment: Liability A/c Debit: 150, Cash A/c Credit: 150

In the above scenario, at the end of the month, we have one item in inventory with value of 100 and the GL inventory balance should also be 100.

GL and Inventory match...

However, many a times, you observe a mismatch between GL and Inventory Values. What could be the reasons?

There may be many reasons for Inventory A/c not matching with GL. A few of the reasons include,

  • Inventory accounting not having been transferred to GL, 
  • Inventory transactions transactions transferred to wrong account, 
  • Inventory accounting entries not yet generated (for example, in Oracle, you have to run the process 'Create Accounting' to create accounting entries), 
  • Manual Journal passed in GL directly etc.
  • One another common error is to map inventory accounting to other system configurations, like 'Receiving Inspection'. 
  • Another major cause of inventory mismatch is 'Material in Transit' where in-transit inventory is accounted as Inventory in GL but physically the material is not available in the system.

How do you handle reconciliation issues?.

First, if you clearly know the above process flow, you will be able to track the inventory transactions and map the same to the accounting values.

If you still face issues, most application vendors provide support to reconcile Inventory to GL since this is one of the pain areas.

If you are an Oracle Apps user, you have some very good supporting docs available in Metalink portal. 

Finally, prevention is better than cure....

To ensure smooth period end closure, ensure that the reconciliation between Inventory and GL is a standard period closing operating procedure.

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