Inventory reconciliation

By Annapoorna


Updated on: Apr 5th, 2022


4 min read

social iconssocial iconssocial iconssocial icons

The practice of reconciling inventory records with the physical inventory items maintained in your store or warehouse is called inventory reconciliation. For this, you need to create a stock reconciliation report that appropriately reflects your existing inventory, as well as the addition or removal of stock items from the database.

Meaning of inventory reconciliation

During inventory reconciliation, you match the physical count of your stock to what is recorded in the inventory records. Counting physical stock kept for sale with the already recorded proof of stock is the first step towards reconciliation of your inventory. Inventory reconciliation also includes counting damaged or obsolete items and identifying the cause of inventory inconsistencies so that they may be resolved. This approach helps improve inventory tracking systems and the prevention of theft.

When inconsistencies are identified, they should be reconciled and updated in the record, as the record should always reflect the actual stock.

Why is inventory reconciliation important?

Merchants have difficulty if inventory data do not match inventory on hand records. Even with the best inventory management software, shrinkage is inevitable. There can be either an excess or shortage of goods in stock compared to what is on records.

Merchants can better manage loss and find the causes of disparities by counting and reconciling inventory regularly. It might be the result of administrative, human mistakes, such as incorrect inventory counts or misplacing things in the stockroom, or it could be the result of a larger issue, such as staff theft or supplier fraud.

How to carry out inventory reconciliation?

Inventory reconciliation is a hands-on procedure that needs meticulous attention to detail and problem-solving abilities. If a mismatch is discovered, management must investigate the company’s stock numbers and processes to resolve the issue.

1. Check physical inventory

Physical inventory is the actual amount of merchandise a company has on hand. Businesses should schedule time for skilled management to conduct physical inventory counts and confirm that their records are accurate.

2. Cross-check the physical inventory to digital records

After the physical counts have been certified, the findings should be compared to the system’s inventory data. If the data do not match, the company must investigate all possible causes of stock shrinkage and devise a strategy to avoid recurring problems.

3. Verify incoming and outgoing shipments

Inventory reconciliation during business hours may introduce new variables from arriving and leaving shipments. This might explain any inventory disparities, which can be resolved by changing digital inventory data. Management should also look back at prior stock reconciliations to see whether they’ve had similar discrepancies in the past.

4. Identify discrepancies and undertake proactive action

Management should prepare a reconciliation statement that addresses the inconsistencies and correct earlier stock records and their inventory management software whenever the disparity is detected. To avoid repeat occurrences, the organisation should create a new standard operating procedure.

5. Compare results to previous reconciliations

Compare the findings of your inventory reconciliation to prior ones. This can aid in the discovery of trends and patterns, as well as the identification of areas that require additional investigation. This is especially beneficial if there are any outstanding issues. Being aware of these inexplicable concerns helps you to focus more intently on those specific items, either preventing future problems or assisting you in determining the source of the problem (shrink, human error, and so on).

6. Conduct reconciliation regularly

If inventory reconciliation isn’t routinely done, the benefits are lost. Maintaining a regular stock reconciliation schedule will improve data accuracy and lower inventory expenses.

Increasing inventory should be a top focus when a company starts to develop. Taking the time to reconcile inventory serves as a quality check for established stock processes and notifies management of any data discrepancies. Managers may use this data to decide which inventory control systems to implement to boost functionality and growth. Establishing an effective stock control system decreases the amount of money spent on correcting stock mismanagement.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more


Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use


ISO 27001

Data Center


SSL Certified Site

128-bit encryption