What is involved in an "Inventory Adjustment"?

An "Inventory Adjustment" primarily involves updating the inventory account to reflect actual physical counts and discrepancies. This process is crucial for accurately accounting for the value of inventory on hand, which can fluctuate due to factors like theft, damage, spoilage, or recording errors. By conducting a physical count and adjusting the inventory records accordingly, businesses ensure that their financial statements accurately represent their true asset values.

Additionally, this adjustment helps maintain accurate inventory levels for effective inventory management, enabling better decision-making for purchasing and sales. The discrepancy between the recorded amount and the actual physical count must be addressed to present a reliable financial position to stakeholders.

In this context, the other options do not relate to inventory adjustments. Updating the cash account pertains to cash management rather than inventory, adjusting accounts receivable focuses on outstanding payments, and recording new inventory purchases overlooks the need to reconcile the existing inventory with actual counts. These distinctions clarify why adjusting the inventory account accurately reflects real-time stock levels and supports business operations.