Perform inventory recalculation, closing, and adjustment processes
Inventory recalculation and closing are critical processes in managing inventory costs and ensuring accurate financial reporting. This unit explores their importance, the steps involved, and best practices for adjustments and month-end procedures.
Importance of recalculation and closing
Inventory recalculation and closing are essential for maintaining accurate inventory valuation and financial records. These processes ensure that issue transactions are settled against receipt transactions based on the selected inventory valuation method. Key benefits include:
Accurate cost allocation for inventory transactions.
Prevention of posting errors in closed periods.
Alignment of inventory values with the general ledger.
Note
Inventory close is mandatory for all inventory models except moving average and standard cost. Attempting to close a financial period without performing inventory close triggers a warning.
Inventory closing process
The inventory closing process involves settling issue transactions to receipt transactions and updating the general ledger to reflect any adjustments. The main steps include:
Preparation: Ensure all required recalculations are completed before initiating the close.
Processing items: Items are queued and processed sequentially, with receipts and issues settled according to the inventory model (for example, FIFO, LIFO).
Adjustments: Cost adjustments are made to issues based on the settled receipts.
General ledger updates: Adjustments are summarized and posted to the general ledger.
Post-close recalculation: Optionally, run a recalculation to adjust inventory values further.
Tip
To optimize system performance run inventory close during off-peak hours.
Best practices for inventory adjustments
Effective inventory adjustments (Inventory management > Journal entries > Items) help maintain accurate inventory and financial records. Consider the following best practices:
Use on-hand inventory adjustments after completing an inventory close to update the cost of remaining inventory.
Perform inventory transaction adjustments before running inventory close to correct incorrect receipts.
Regularly monitor and correct negative inventory to avoid inaccuracies in costing and financial reporting.
Note
On-hand adjustments must be dated as of the last inventory close period and can't be modified.
Month-end checklist: Recalculation and closing steps
A structured month-end checklist ensures a smooth recalculation and closing process. Follow these steps for a month-end checklist:
Complete all transactions: Ensure all inventory transactions for the period are posted.
Run recalculations: Adjust inventory values as needed to reflect accurate costs.
Perform inventory close: Settle transactions and update the general ledger.
Review logs and warnings: Address any unresolved issues or warnings reported during the close.
Adjust on-hand inventory: Update the cost of remaining inventory if necessary.
Reopen periods cautiously: If necessary, reverse only the most recent inventory close.
By adhering to these steps, you can ensure accurate inventory valuation and financial reporting.
For more on how to inventory close and adjustment, see Inventory closing and adjustment
For more on how to adjust inventory cost values, see Adjust on-hand inventory cost values