Reconciling Parts Inventory GL against the actual valuation of the Parts Inventory Records
Parts Inventory Reconciliation
As part of Standard Accounting Practices, it is the responsibility of each dealership to reconcile their Parts Inventory GL against the actual valuation of the Parts Inventory Records on a regular basis.
There are three primary reasons why your Parts Inventory GL will not agree with the total valuation of the Parts Inventory Records.
- Average Cost calculation to 2 decimal places
- User Accounting Entries against the Parts Inventory GL
- Incorrect Balancing Procedures
Average Cost Calculation:
As you know, dollar values in the Accounting applications are retained with only 2 decimal places. The Parts Inventory Records are valued based on a Weighted Average Cost System and the average cost is also calculated to only 2 decimal places. Because of this, it is quite common to see small variances between the GL and the Part Records.
The following example should clarify how these small variances can occur:
A part is stocked in for the first time and you receive 10 at a cost of $10.17 each. Since it is the first time you’ve stocked the part in the Average Cost is also $10.17
The vendor invoice for this receiving posts $101.70 as a debit to your Parts GL (10 X 10.17)
The Part Record Valuation for this part, which is based on Average Cost, is 10 X 10.17 = $101.70
Without having sold any of this part, you stock in 10 more but at a cost of $10.18
The vendor invoice for this receiving posts $101.80 as a debit to your Parts GL (10 X 10.18)
The total amount posted to the Parts GL for the two receivings is (101.70 + 101.80) = $203.50
Average Cost is calculated using the following formula:
= (( (Old_Qty_InStk X Old_Avg_Cost) + (Qty_Recd * New_Cost) ) / New_Qty_InStk )
= (( ( 10 X 10.17 ) + ( 10 X 10.18 ) ) / 20 )
= ( 101.70 + 101.80 ) / 20
= 203.50 / 20
= $10.18 on part record (rounded to two decimal places)
Now the Part Record Valuation for this part is 20 X 10.18 = $203.60
These rounding variances will fluctuate up and down depending on whether the average cost was rounded up or down.
User Entries against the Parts Inventory GL:
Any entries to your Parts Inventory GL Account must always have a corresponding immediate change to one or more Parts Records. The only exception is your inventory reconciliation journal entry.
Whenever a user posts an accounting entry against the Parts Inventory GL without modifying a part record they are immediately causing a discrepancy between the Part Inventory Records and the Parts Inventory GL.
For this reason, a user must never generate such accounting entries without it having a direct and immediate effect on a part record.
There are two typical ways a user would incorrectly generate an accounting entry against the Parts GL account:
- Posting an accounting journal entry which includes the Parts Inventory GL account
- Triggers the Parts Inventory GL account in a Miscellaneous Line Item
Incorrect Balancing Procedures:
If proper procedures are not being followed to reconcile your Parts GL the Parts Records the two will never be truly in balance. Please ensure that you follow the proper procedures outlined in this document.
How to Properly Reconcile your Parts Inventory
To properly reconcile your Parts Inventory against the GL you want to ensure that no other users are actively modifying records during the process. You should perform this process outside of your normal business hours.
Since the reporting of your Parts Inventory Records is time sensitive you can easily take a snapshot by refreshing your Training Mode. This allows you to perform the reconciliation at your leisure without being concern about other users modifying things during the process.
Step #1 – Obtain Parts Inventory GL Balance
In your Chart of Accounts open the Parts Inventory GL account and select the “Transactions” tab
You must ensure that the “End Date” checkbox is NOT selected. The right most number at the bottom for “Ending Balance” is the balance of your Parts Inventory GL account as indicated above.
Step #2 – Obtain Parts Records “Net In Stock” total cost
Using the General Part Inventory Report check “Net In Stock” inventory. Be sure that you “Include Inactive” parts.
Once the report has been generated go to the very last page and note the report “Total”. This will be the total cost of all of your parts including your short sales.
Step #3 – Perform the Reconciliation Calculation
Net Parts Records Total Cost Valuation – Parts Inventory GL Balance = GL Adjustment Required
If the GL Adjustment Required is a positive value this means that your GL needs to increase in order to reconcile. Conversely, if the GL Adjustment Required is a negative value the GL needs to decrease.
Step #4 – Posting the Adjusting Journal Entry
Create a General Journal Entry to adjust the Parts Inventory GL by an amount equal to “GL Adjustment Required”. The offsetting entry is typically posted to a Parts Inventory Adjustment GL Account.