Chapter 7
Inventory: Merchandising Transactions
191
Controls Related to Inventory
The way a company handles its inventory can have a major impact on the state of the business.
After all, basic economic theory is about supply and demand. If customers demand goods or
services, the goal of a business is tomeet that demand. In essence, this is what inventory management
is about: to manage supply in order to meet demand.
A company with toomuch inventory on hand risks tying up resources that could be used productively
in other areas. A company with too little inventory on hand risks not having enough supply to
meet customer demand. There is a delicate balance that must
be maintained by a company. Perpetual inventory systems help
companies to maintain such a balance.
Keeping track of a company’s inventory can be a challenge,
but computer software can help mitigate this challenge.
However, every accountant should have an understanding of
how inventory is tracked and recorded manually.
First, even with the use of technology, errors can be made.
It is the responsibility of the accounting department and
management to ensure that inventory information is accurate
and reliable.
Second,a thoroughknowledge ofmanual accountingprocedures
helps the accountant to develop the kinds of controls necessary
to ensure that this type of asset is managed responsibly and
with integrity.
We will provide examples to show how an accountant can develop a personal method of controlling
inventory manually. We will then take a closer look at the kinds of controls needed when dealing
with the inventory section of the balance sheet.
Compliance with Plans, Policies, Procedures, Regulations and Laws
All aspects of doing business should be governed by the appropriate plans, policies, procedures,
laws and regulations.This is certainly true regarding a company’s handling and control of inventory.
All businesses should have plans that are formalized through
general policies that lead to specific procedures. These should
all comply with the regulations and laws in place within the
jurisdiction of the business.
For example, a company can have a plan to train all inventory
personnel. This plan can include detection controls that single
out instances of procedures not being followed. An example of
such a procedure could be to have all items tagged and scanned
Keeping track of inventory is one of the
primary challenges of doing business. This
is why transactions need to be recorded
properly and relevant information presented
in a way that helps company decision makers.
Maintaining the integrity of information is
an obligation that companies have when
implementing inventory controls.
