Stock adjustments: reason codes and who approves them

After a count the book is corrected to match the shelf. That correction, the stock adjustment, is the most sensitive step of the whole exercise, because it changes the figures that finance and head office read. Done carelessly, it makes a difference disappear without anyone knowing why. Done with reason codes and a named approver, it leaves a trail that a head-office auditor can follow. The procedure below is simple enough for a small warehouse.

Hold adjustments until the explanation exists

Do not post anything to the book while the count is under way. First produce the final variance list, each line with its cause: entry error, timing, mix-up, count error or unexplained. Keep updating the list every day while adjustments are on hold, and pass on only the lines that have an explanation. Only differences that have an explanation or a decision move on to the adjustment step. Timing differences are not adjustments: post the missing document with its real date. Whether stock is written off is a decision for the company and not for the counting team, which supplies the facts the decision needs.

Agree reason codes

Use a short, fixed list. For illustration:

• A1 Quantity correction: an entry error is put right.
• A2 Transfer between items: in a confirmed mix-up pair, one item is reduced and the other increased by the same quantity.
• A3 Write-off of damaged or scrapped goods, where there is evidence such as a photograph.
• A4 Write-off of a shortage that remains unexplained.
• A5 Entry of a surplus that remains unexplained.

Every line carries one code and a short note. A large share of A4 and A5 is a warning sign. Keep the same list of codes from one count to the next, so that quarter-by-quarter comparison stays possible.

Set approval limits

The company sets the limits, and the figures below are only an example. For illustration, suppose the variance list has 40 lines. 22 are timing differences that end when the missing documents are entered. 8 are A1, 4 are A2 (two pairs), 4 are A3 and 2 are A4. Of the 18 lines that need an adjustment, only the 3 above 200 USD per line (one A3 and two A4) go up to the finance manager, and the rest are settled at warehouse level.

• Up to 200 USD per line and 1,000 USD in total: warehouse manager and accounts clerk.
• Up to 2,000 USD per line: finance manager.
• Above that: the local director, with head office informed.

Base the limits on value and not only on quantity, and set lower limits for A4 and A5 than for A1 and A2. The person who counts, the person who enters the adjustment and the person who approves it should be three different people. Name a deputy approver as well, for when the approver is on leave.

Attach evidence to each line, and do not net items off

Keep the location scan record, the recount result, the document references, the photograph of any damage, the cause note and the approver's signature and date in a folder together with the variance list.

Do not cancel the surplus of one item against the shortage of another unless they are a confirmed mix-up pair (A2). Netting hides two separate errors and distorts the value. For the same reason, do not adjust "to make it zero" before the cause has been checked.

Check after posting

Adjustments are not entered by one person alone: a second person compares the entries with the approved list line by line. After the adjustments are entered, export the book again and confirm that the posted quantities add up to the approved list. The adjustment log records the date, document number, quantity before and after, code and approver. Review the log each quarter to see which codes are most frequent. If A4 keeps appearing for the same item or the same shift, investigate it.

Summary

An adjustment is not only a correction of the book; it is a record of why the book was corrected. With codes, limits, evidence and separate people, the figures are put right and the trail stays readable. Smart Inventory provides the variance list and the evidence behind it, while writing off stock and booking the result remain decisions for your company.