What's the difference / Gap in accounts?

Ideally- Physical Inventory and system inventory should match- if System is followed properly. However Practically - this is a big challenge to achieve.

There are number of reasons for difference in inventory ledger count and Physical count.

1. Sales (Invoicing)- did not go via system or sales invoiced but not delivered

2. Purchase (Receipt) - did not go via system or Invoice posted but goods not received

3. Goods retuned by customer- and credit  not done or credit note done but physically goods not returned

4. Goods returned to vendor and debit note not done or Debit note done but goods not returned physically.

5.. Errors in posting and actual delivery- (Pack size, incorrect quantity, wrong picking/identification  of goods, samples received etc.) Some goods- have shortage naturally due to moisture and evaporation.

6. Most importantly- this is an internal control issue as well. Goods lost/ theft and system and procedures are not functioning, employees are finding ways to depart from the guidelines for delivery and receiving of goods.

The minimum the difference in Physical and system count- more the efficient system.

The action for sorting the difference - depends on the reason for difference. Some circumstances just require to write off, some can be corrected via customer, vendor  or employees. Less the physical count- bigger is the loss. It does not mean that positive inventory adjustments are good- its more open room for a bigger loss to organisation.

 

These things happens mostly in construction type of companies, if this situation occurs, just take the statement and see opening balance, inward, outward and balance, if balance doesn't match then you have to investigate where that inventory gone.

I am very happy with all your answers, Especially  Renu Jajoo  As first we should see what exactly the reason of the difference and fix it first before putting a certain number into the Balance Sheet.

After fixing every problem. the right figure is the actual figure on the ground of the inventory physical count .

 

• users must understand why auditor can only provide reasonable assurance and not the absolute assurance and what are inherent limitations of the audit
• users must understand that general purpose financial statements are meant for general needs of users and even if they have been audited in a best way possible but it does not mean audited financial statements can help in any decision making situation
• users must realize that auditor’s work is relative to circumstances that require use of judgment which may be wrong. Although auditor works diligently but it does not always mean if judgment is wrong then auditor is guilty of ignorance rather it will be assessed based on what auditor could possibly do and what he actually did.
• Although auditor and management is required to produce financial statements in a way that are easy to understand but users are also expected to have certain degree of relevant knowledge on how to use and interpret financial statements. Financial statements are not for everyone to read and act upon.
• For auditors to understand users’ expectations they must arrange workshops or seminars so that users at least feel that they have been heard. Auditor must not rule out everything on the basis of lack of knowledge on part of users.
• Auditor must make audit reports easy to understand for the masses and avoid to great extent any technical jargon that can impair ordinary person’s understanding who lack skillful insight of financial statements.
• Auditor is already providing less than absolute assurance so he must not leave any effort undone to maintain reasonable level of assurance by complying with the requirements of relevant auditing standards. For example, proper planning, appropriate understanding of entity to design further audit procedures, maintaining skeptic attitude, reducing sampling risk to appropriate level etc.

Okay, here we expect one of the following mistakes 1st would be in inventory recording On both in & out for $ & Q If there was no mistake here so, 2nd would be a problem in physical inventory control here you should investigate Finally inventory accounting balance should be edites to equal the physical count If there is a strong and effective control system on inventory cycle , no such a miatake should appear

Thank you for invitation. Really I don't know . Agree with expert answer.

After you have carefully investigated the discrepancies, you need to make adjustments. Adjustments need to be made in the inventory listing (sub-ledger, perpetual inventory records) and the ledger. For example, your physical inventory result shows $17,200, while book inventory is $17,500. The $300 difference will be adjusted in the sub-ledger (detailed inventory listing) by changing inventory parts with differences for correct unit quantities. You should also make a following entry: Debit inventory shortage and Credit inventory for $300. Note, however, that sometimes accounting software will make an adjusting entry in the ledger automatically after you have made necessary changes in the inventory sub-ledger. Consult your accounting software documentation for more guidance.

 

If we found any such differences, we will take the counted inventory in accounts, because that is the correct stock and investigate where the mistake happened.

Physical inventory stock should be recorded in books as it is the original stock availability. This may be stock gain or stock loss. Investigation should be made on difference.

Well in this case counted inventory to be considered and necessary JV entry to be passed to correct the stock and simultaneously trails to be made to find out the loop holes and the difference to be quantify to the higher authority immediately

Abdul Khaliue answer serves the purpose