“The system says 250, but the shelf holds 237.” That sounds like the beginning of a 13-unit shortage entry. It is really the beginning of a small investigation. Some units may be elsewhere, may have left under an unrecorded document, or may have been counted using a different unit of measure. Immediately accepting the difference changes the balance without explaining where the goods went.
This educational case concerns a business with a main warehouse and an order-staging area. It demonstrates a practical investigation, not counting instructions attributed to an accounting standard. IAS 2 supports recognising inventory losses as expenses; the counting and reconciliation procedures below are suggested controls to adapt to the operation.
Thirteen units do not necessarily mean thirteen missing units
An independent recount confirms 237 units in the locations included on the count sheet. A location review finds five intact units in a staging area omitted from the sheet. A delivery review identifies another six units delivered to a customer before the count, supported by a delivery document whose inventory movement was not completed.
The comprehensive physical count is now 242 units: 237 plus five. After checking the six-unit dispatch and the conditions for the associated sales accounting, the comparable recorded quantity becomes 244: 250 less six. The unexplained difference is two units, not thirteen.
This separation prevents two errors: recording a shortage for goods sitting in an overlooked location, and recording a customer's dispatch twice when the missing movement is subsequently entered. It is not enough for the screen eventually to show 242. It must reach that quantity for the right reasons, or the apparent reconciliation will unravel when outstanding documents are completed.
Match the moment before matching the number
If counting starts at nine in the morning while sales continue until eleven, comparing the result with a balance printed at noon is not a like-for-like exercise. Define the cutoff, capture movements during the count, or suspend movement within the area being counted where practical. Both quantities must represent the same point in time.
Separate newly arrived goods awaiting inspection, returns under review, consignment goods and third-party property. A box's presence in the building does not establish that it belongs in the business's inventory; its departure does not independently determine the accounting timing either. Review the documents and contractual terms rather than using physical location as the only rule.
Internal transfers need attention too. A transfer request from the first warehouse does not prove receipt by the second. Connect dispatch and receipt evidence, including goods in transit or waiting areas, so that a shortage in one place and a surplus in another are not treated as unrelated adjustments.
Before approving the two-unit adjustment
- Confirm the item code and counting unit: does a carton contain ten units or twelve?
- Look for a similar product placed in an adjacent bin or recorded under the wrong code.
- Review incomplete movements, returns and transfers without changing documents merely to force agreement.
- Retain the recount, explanation, reviewer and approval by the person authorised to accept the adjustment.
If two units are confirmed lost and the applicable unit cost is SAR 45, the illustrative effect is SAR 90. That differs from the units' expected sales value: the adjustment is not measured using the shelf ticket price. Goods that physically exist but are damaged present another issue, potentially requiring a separate assessment of condition and value rather than a quantity reduction alone.
A useful count produces a traceable file: quantity before review, legitimate movements completed, locations added to the count and an approved remaining difference. Then monitor recurring causes, not just the total value of adjustments. Frequent small differences in staging may indicate incomplete dispatch recording, while repeated carton errors suggest a need to correct units of measure and train staff.
Counting can therefore become a test of everyday movement quality rather than a scheduled exercise in clearing differences. Success does not require every variance to disappear. It requires remaining differences to be understood and addressed, with specific action to reduce their recurrence.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
