Last reviewed: July 2026.
This guide focuses on the practical inventory accounting workflow: purchasing and cost-of-sales journals, physical stock counts, cut-off, item-level NRV calculations, write-down entries and reconciliation to the general ledger.
For the full IAS 2 framework—including qualifying cost, conversion overhead, permitted cost formulas, write-down reversals and disclosures—read the IAS 2 inventory measurement guide.
Period-end inventory workflow
- Confirm ownership and identify all locations, third-party goods and goods in transit.
- Freeze or control inventory movements during the physical count.
- Count quantities and record condition, damage, expiry and obsolescence.
- Reconcile count results to the inventory system and investigate differences.
- Test purchase, production and sales cut-off.
- Apply the approved cost formula and update qualifying costs.
- Compare cost with NRV using current evidence.
- Post quantity, cost and write-down adjustments.
- Reconcile the inventory subledger, valuation report and general ledger.
- Retain approval and evidence for every material adjustment.
Perpetual-system journal flow
| Transaction | Debit | Credit |
|---|---|---|
| Purchase qualifying inventory | Inventory | Cash or payables |
| Return inventory to supplier | Cash, payable or receivable | Inventory |
| Recognise cost when goods are sold | Cost of sales | Inventory |
| Record an inventory write-down | Inventory write-down expense | Inventory or allowance |
| Reverse a qualifying prior write-down | Inventory or allowance | Inventory expense or reversal account |
The exact account names depend on the entity’s chart of accounts. The journal must agree with the inventory valuation report and the supporting item-level calculations.
Periodic-system cost-of-sales calculation
Cost of sales = Opening inventory + Net purchases and production costs − Closing inventory
In a periodic system, purchases may be accumulated separately and closing inventory is established through the period-end count and valuation. The closing adjustment must be supported by the same ownership, cut-off, cost and NRV procedures used in a perpetual system.
Worked perpetual-sale example
Goods are sold for 15,000 CU. Their recorded inventory cost is 9,000 CU. Two separate accounting effects arise:
Revenue entry
Debit cash or receivable 15,000 CU
Credit revenue 15,000 CU
Cost entry
Debit cost of sales 9,000 CU
Credit inventory 9,000 CU
Revenue and cost should not be combined into one net amount because they represent different financial statement elements.
Physical stock count controls
- issue clear count instructions and assign independent count teams;
- number count sheets or control electronic count records;
- pause movements or maintain a movement log during the count;
- identify damaged, expired, obsolete and slow-moving items;
- separate goods owned by third parties;
- perform test counts from floor to sheet and sheet to floor;
- investigate material differences before posting adjustments;
- retain signed count evidence and adjustment approval.
Ownership and cut-off
Physical possession does not always determine ownership. Review purchase terms, shipping terms, consignment arrangements, bill-and-hold situations and goods held at third-party warehouses.
For cut-off testing, match goods received and dispatched immediately before and after the reporting date to invoices, goods-received notes, dispatch records and ownership terms. The objective is to record purchases, sales and inventory in the correct period.
Count-difference adjustment
If the inventory system shows 500 units but the verified physical count is 490 units, investigate the 10-unit difference before posting. Where the shortage is confirmed and each unit costs 20 CU:
Debit: Inventory shortage or cost-of-sales expense 200 CU
Credit: Inventory 200 CU
Material or unusual shortages may require separate investigation, approval and disclosure rather than automatic posting to cost of sales.
Item-level NRV worksheet
| Product | Cost | Selling price | Completion/selling costs | NRV | Carrying amount | Write-down |
|---|---|---|---|---|---|---|
| A | 52 | 60 | 5 | 55 | 52 | 0 |
| B | 48 | 50 | 6 | 44 | 44 | 4 |
| C | 30 | 28 | 2 | 26 | 26 | 4 |
| Total | 8 |
Product A remains at cost because NRV exceeds cost. Products B and C are written down by 4 CU each. The total write-down is 8 CU.
Write-down journal
Using a direct reduction:
Debit: Inventory write-down expense 8 CU
Credit: Inventory 8 CU
Using an allowance account:
Debit: Inventory write-down expense 8 CU
Credit: Allowance for inventory write-down 8 CU
The allowance method can preserve gross cost information, but the balance and movement must remain transparent and reconciled.
Reversal workflow
A reversal is not automatic. Update the item-level NRV evidence, identify why the original write-down no longer applies and limit the reversal to the amount previously recognised.
Example: an item originally written down by 8 CU later supports a 5 CU reversal.
Debit: Inventory or allowance 5 CU
Credit: Inventory expense or reversal account 5 CU
Slow-moving and obsolete inventory
An ageing report is a starting point, not the final valuation. Review recent and expected sales, expiry dates, damage, product redesign, customer commitments, completion work and disposal options. Avoid applying one unsupported percentage to every aged item when risks differ.
Standard-cost reconciliation
Compare standard costs with actual purchasing and production results. Investigate material price, usage, labour and overhead variances. Update standards when they no longer approximate cost and prevent unapproved master-data changes.
General-ledger reconciliation
The period-end reconciliation should connect:
- inventory system quantities and unit costs;
- physical count results;
- goods in transit and third-party inventory schedules;
- standard-cost and production-variance reports;
- NRV and obsolescence calculations;
- the inventory subledger and general ledger;
- the financial statement inventory note and cost of sales.
Every reconciling item should have an owner, explanation, supporting evidence and expected resolution date.
Practical close checklist
- all count sheets accounted for;
- count differences investigated and approved;
- purchase and sales cut-off tested;
- ownership of consignment and in-transit goods confirmed;
- approved cost formula applied consistently;
- standard costs reviewed against actual results;
- damaged, obsolete and slow-moving items reviewed for NRV;
- write-downs and reversals supported and approved;
- subledger reconciled to the general ledger;
- material movements and disclosures reviewed.
Related Accounting Support guides
- IAS 2 inventory measurement and reporting framework
- Stocktaking procedures
- Inventory valuation methods
- Accounting for stocks
Authoritative references
Key takeaway
Reliable inventory accounting requires more than a year-end quantity. Confirm ownership and cut-off, reconcile physical records, apply approved costs, compare each relevant item or group with realistic NRV evidence and post transparent journals. The valuation report, subledger, general ledger and financial statements should all explain the same closing balance.