Inventory Accounting

Topic: Inventory Accounting

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What is inventory accounting?

Inventory accounting is the process of reconciling the physical inventory with the logical inventory. Let us take an example here. I am dealing with a product called model-A. The number of model-A available in the warehouse is called physical inventory. And the number of model-A my ERP shows is the logical inventory. Due to operations and other issues discrepancy may arise between the physical inventory and logical inventory. Hence inventory accounting is mandatory in any organization that deals with products. Let us take two scenarios:

Scenario-1: I have more Model-A in the warehouse than in the system, meaning my physical inventory is more than the logical inventory. This may lead to overproduction and obsolescence or expiry of products.
Scenario-2: I have less Model-A in the warehouse than in the system, meaning my physical inventory is less than the logical inventory. This may lead to the wrong promise to the customers and customer dissatisfaction.

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