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TL;DR: Inventory adjustment ensures your system stock matches physical stock, helping Indian SME manufacturers maintain accurate financials, avoid losses, and make better decisions.
What Is an Inventory Adjustment?
An inventory adjustment is the process of correcting stock quantities or values in your system so they match the actual physical inventory. Adjustments usually happen due to damage, theft, counting errors, or valuation changes.
Why Are Inventory Adjustments Important?
Inventory adjustments keep accounting records accurate and compliant. They directly affect cost of goods sold, pricing accuracy, and financial reporting, giving management a true picture of business health.
Types of Inventory Adjustments
Decreasing quantity – Used when physical stock is less than recorded stock.
Increasing quantity – Used when physical stock is more than system stock.
Re-evaluation – Quantity remains the same, but item value is corrected.
How to Make an Inventory Adjustment
Step 1: Obtain Information
Calculate opening inventory and total purchases for the period.
Step 2: Calculate Cost of Goods Sold
Cost of goods sold equals opening inventory plus purchases minus closing inventory.
Inventory Adjustment Examples
Seasonal Demand Adjustment
A toy manufacturer adjusts inventory to account for seasonal stock buildup and ensure accurate cost of goods sold calculation.
Overstated Inventory
Duplicate stock entry is corrected to avoid inflated closing inventory and incorrect profit reporting.
Understated Inventory
Missing raw material entry is added back so valuation and financial reporting reflect actual stock.
Tips for Making Inventory Adjustments
Use inventory software to reduce manual errors
Communicate changes clearly across departments
Perform regular spot checks
Analyse past errors to prevent recurrence
FAQs
What happens if inventory adjustments are done incorrectly?
Incorrect adjustments can lead to inaccurate financial statements, stockouts, or excess inventory, affecting profitability and decision-making.
How often should inventory be adjusted?
Regular spot checks during the year and a mandatory year-end physical verification are recommended.
Can inventory adjustments be automated?
Yes. Modern inventory management software can automate reconciliation, adjustments, and reporting.
Should adjustments use purchase price or actual cost?
Adjustments should be based on actual cost to ensure accurate financial reporting.
Do inventory adjustments affect profits?
Yes. Inventory adjustments directly impact cost of goods sold and reported profitability.
