Parts Reconciliation using Accrual Based Accounting
To reconcile inventory, there are a few variables that need to be considered when looking at your physical valuation when comparing it to the GL account balance.
First, the costing method being used to value inventory will be either replacement cost or FIFO cost.
**For replacement cost companies, there are some additional considerations when ensuring that the GL value relates correctly to the physical value. Journal entries should be completed each time you re-price inventory from a price file to account for cost increases in your physical inventory that would not have been posted to the GL account when parts were repriced.
**For FIFO cost companies-- Ensure you run the Correct FIFO function to ensure a valid cost is associated with every part number in your inventory before reconciling inventory.
The first component to reconciling your inventory account begins with your GL. You will want to use the running balance of your parts inventory account to compare to the shelf value.
This is the value you will compare your physical valuation with. To do so, you will first run an inventory valuation for all inventory to see what the value is of parts that you have available in your inventory. Run the Parts Inventory Valuation Detail (recently updated to include FIFO or Replacement Cost based on warehouse settings).
This report will show you the value of all parts that are available in your on hands within inventory, which should correspond to the value of the parts inventory GL account. This should be a direct comparison when using accrual accounting, as parts in process as well as parts that have been received but not yet paid are accounted for within the accrual process (outlined below).
Accrual Accounting - WIP Consideration in parts reconciliation
Accrual accounting for WIP relates to parts that have been removed from your parts inventory GL account and posted to the WIP GL account when the part is added to an open work order. They have also been removed from your physical inventory count as they are not an available on hand and are committed to the work order they have been entered to.
For reconciliation purposes, then, the part has been removed from both your physical inventory valuation upon adding it to the work order and also relieved from the parts inventory GL when it is added to the work order and would not be a consideration for parts reconciliation. You can reconcile this WIP account independently by taking the value within the WIP GL account and comparing it to the Parts in Progress report within Softbase. This report reflects all parts currently committed to an open order and their value, which would directly correlate to the balance that is being held in the WIP account until the work order is invoiced, at which time the part would clear from both the report and the GL account. You will want to take the totals of the parts cost column for each department and total them as needed to match to the running balance in the WIP GL Account.
Accrual Accounting - PO Accrual Considerations in parts reconciliation
When using PO accrual accounting, when a part is received into inventory there is a value posted to the parts inventory GL account to reflect the value that you are adding to your physical on hand value with the offset posting to the PO accrual account. The value of the part is posted into your parts inventory GL at the same time it is posted into your physical on hands to ensure those values are consistent.
In this instance, because the inventory account is debited when the part is physically received into the system, the GL value should match to the physical valuation of the parts and there would not be an additional consideration for the reconciliation. The accrued account balance, then, would be a representation of parts that have been received into inventory but have not yet had an AP invoice posted into the system yet. When the AP invoice is later entered, the accrual account will be debited to clear that value to zero and will move to a payables account for payment.
For more information on the accrual accounting process and how the system will post based on part sales/receipts, the knowledge article outlining the process is found here:
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