Question

There are a plethora of reasons why the dollar amount of a company's inventory in the accounting records differs from the dollar value of the physical inventory count. Obviously theft by employees and customers is one reason for the disparity, but there are many others. In one-paragraph discuss another reason why the physical inventory count may not agree with the amount of inventory in the accounting records. Then discuss a strategy or internal control measure to put in place to safeguard against that loss.

Could you please explain answer in more detail?

Answer 1

REASONS FOR DIFFERENCE BETWEEN VALUE OF INVENTORY IN ACCOUNTING RECORDS AND PHYSICAL INVENTORY COUNT:

As stated in the question the prime reason is the theft by employees and customer, but that is not the only reason there are wide range of reasons namely:-

• There can be damage in stock which is not recorded in the books but found at the physical inventory count
• Various human errors can be factors such as wrong labelling of the inventory, misplacing the inventory or storing it in a different location
• Another important reason can be the incorrect measurement , that is recording a measurement but in reality it differs.
• There can be situations where the inventory register is managed by a software and there exsists technical faults in the software.
• A product in the inventory mistaken for another product i.e labelled or sold in a different name can also be cause
• At times there can even be situations where product is returned and which is duly accounted but not placed back in the storage location.

VARIOUS INTERNAL CONTROL MEASURES TO REDUCE LOSS DUE DISPARITY IN VALUE OF INVENTORY IN BOOKS AND IN ITS PHYSICAL COUNT

• Bring in personal accountability to the inventory inward and outward register. a person should be made accountable for the same
• Reduce human errors by bringing in proper controls on correct labelling , more organised storage locations and proper measurement
• The inventory management should continously updated constantly checked
• A more frequent stock checking routine and reconciliation of the inventory , purchase and sales registers