Inventory reconciliation is the process of confirming that the units your accounting records say you own match the units you actually have on hand, on order, or in transit. When the two numbers agree, COGS is accurate, gross margin is meaningful, and the balance sheet reflects reality. When they do not agree, the discrepancy compresses margin silently, understates or overstates assets, and produces misleading profitability numbers that follow you to tax time.
For marketplace sellers, the reconciliation challenge is more complex than for a retailer with one warehouse. Inventory can sit in multiple Amazon fulfillment centres across the country, in transit between locations, reserved against returns, held in a receiving inspection state, or identified as damaged or lost. Shopify sellers using multiple fulfillment locations or a third-party logistics provider face similar fragmentation. A reconciliation that only looks at what is in one place will miss units that are accounted for elsewhere.
This guide covers how inventory reconciliation works for marketplace sellers, what reports and records are needed for each channel, how to handle the most common discrepancies, and how often the process should run.
Why the Books and Physical Reality Diverge
Inventory records and physical units diverge for predictable reasons. Understanding the cause of a discrepancy matters because the accounting treatment depends on what happened to the units.
Receiving errors. When a shipment arrives and is checked in, units are added to inventory at their recorded landed cost. If the receiving count is wrong, either because the supplier shipped a different quantity than invoiced, because units were damaged in transit, or because the receiving count itself was inaccurate, the accounting record and physical reality separate from the first day the shipment is recorded.
Platform movement the seller did not record. Amazon moves FBA inventory between fulfillment centres for placement optimization. Units in transit between centres appear in Amazon’s system as moving inventory, not as units available for sale. If inventory records only reflect units available for purchase, the balance will not match the total inventory Amazon holds on your behalf.
Returns not fully processed. When a customer returns a unit, the platform credits the seller for part of the sale. The returned unit may be returned to your sellable inventory, classified as unfulfillable, or flagged for disposal. If the accounting system records only the financial credit and not the inventory status of the returned unit, the physical count and records will disagree.
FBA reimbursements for lost or damaged inventory. Amazon operates at significant scale, and units are occasionally lost or damaged in the fulfillment process. Amazon’s FBA reimbursement policy covers eligible seller-owned inventory lost or damaged in Amazon’s fulfillment network, and Amazon may replace the item or reimburse the seller. When Amazon reimburses a seller for lost inventory, the accounting treatment is compensation for a lost asset, not a product sale. The reimbursement amount should be recognized and the inventory balance should be reduced to reflect the units that no longer exist.
Inventory write-downs not recorded. Slow-moving inventory, products that become obsolete, damaged units that cannot be resold, and items removed from FBA at the seller’s request should be written down or removed from inventory. If the physical removal happens without a corresponding accounting entry, the balance sheet continues to show inventory that does not exist.
Purchase orders recorded before goods arrive. When a purchase order is recorded as a bill on receipt of the supplier invoice, some accounting workflows add the units to inventory at the same time. If the goods are still in transit when the PO is entered, inventory is overstated until the physical shipment arrives.
The Reports You Need
Before reconciling, you need the right source data from each platform.
Amazon
Manage FBA Inventory report. Available in Seller Central under Reports > Fulfillment. Shows current Amazon-fulfilled inventory details by SKU, including warehouse quantity, fulfillable quantity, unsellable quantity, reserved quantity, total quantity, inbound working/shipped/receiving quantities, and researching quantity. This is the most useful current-state report for comparing the total units Amazon is holding or processing on your behalf.
Manage Inventory Health report. Also available in Seller Central under Reports > Fulfillment. Shows inventory planning and health metrics such as available units, pending removal quantity, aged inventory, inbound activity, estimated storage fees, and recommended actions. This is useful for identifying units that may need write-down, removal, or follow-up, but it should not be treated as a full unit reconciliation by itself.
Removal Order Detail Report. Shows removal orders placed during a period, including requested, shipped, disposed, cancelled, and in-process quantities. Units removed should be reflected in your inventory records, either returned to sellable stock, moved to another location, or written off.
Reimbursement Report. Lists itemized FBA reimbursements Amazon has issued during the period, including the reason code, per-unit amount, total amount, and whether reimbursement was made in cash or inventory. Use this report to identify lost, damaged, or returned inventory events that need accounting review, including any later reversals.
Inventory Ledger Report. Available in Reports > Fulfillment. Shows every inventory transaction during a period: received, sold, returned, reimbursed, adjusted, disposed. This is the most useful report for identifying exactly when and why the unit count changed during the period.
Shopify
For Shopify sellers managing their own inventory or using a third-party logistics provider, inventory source data comes from:
Shopify inventory reports and inventory page. Inventory reports are available under Analytics > Reports, and the Inventory page shows inventory states by location. Shopify distinguishes between On hand, Available, Committed, Unavailable, and Incoming inventory. For reconciliation, use the On hand count by active location, not only the Available quantity shown in some inventory reports, because Available excludes committed, unavailable, and incoming units.
3PL warehouse reports. If a third-party logistics provider holds your inventory, their warehouse management system is the authoritative source for physical units. Most providers can export a stock-on-hand report by SKU that can be compared against Shopify’s inventory records and your accounting system.
Other Platforms
Walmart and Etsy sellers who fulfill from their own inventory or a 3PL use the same warehouse-side reports. Etsy sellers using print-on-demand production partners generally do not hold finished-goods inventory in the same way, but Etsy shipping labels alone are not fulfillment: the seller remains responsible for making sure orders are shipped.
How to Run the Reconciliation
Inventory reconciliation compares three numbers for each SKU:
- The inventory balance in your accounting system (units at cost)
- The inventory count shown in the platform’s reports (units)
- The physical count (units, if applicable)
The reconciliation identifies where these three numbers diverge, traces each discrepancy to a cause, and records the adjustments needed to bring the accounting records into line with reality.
Step 1: Pull the accounting system balance. Export a current inventory valuation report from your accounting software. This should show each SKU, the unit count on hand, the unit cost, and the total inventory value. Confirm the unit cost reflects full landed cost per unit, not just the purchase price.
Step 2: Pull the platform inventory report. For Amazon sellers, download the Manage FBA Inventory report and Inventory Ledger for the period. Confirm the total inventory position per SKU, including reserved, unsellable, researching, and relevant inbound quantities, not only units currently available for sale. For Shopify or 3PL-based sellers, pull the on-hand inventory by location or the warehouse stock-on-hand report.
Step 3: Compare counts by SKU. Match the accounting system count to the platform count for each SKU. Flag discrepancies. A discrepancy means one of three things: a transaction was recorded in one place but not the other, a reimbursement or adjustment was not reflected in the books, or there is an error in one of the source reports.
Step 4: Trace each discrepancy. For each flagged SKU, review the transaction history. The Amazon Inventory Ledger is useful here because it shows every unit movement during the period. Common causes include reimbursements not recorded, returns not fully processed, or units in transit that are showing in one report but not the other.
Step 5: Record adjustments. Once each discrepancy has been traced to a cause, record the appropriate accounting entry. A unit that was lost and reimbursed by Amazon needs two entries: remove the unit from inventory at cost, and record the reimbursement as other income or a recovery account. A unit that was written off due to damage needs a single entry reducing inventory and recording the write-down as an expense.
Step 6: Confirm the closing balance. After adjustments, the accounting system unit count should match the platform report count. The difference in the opening and closing inventory values, adjusted for purchases and write-downs, should reconcile to COGS for the period.
Handling FBA Reimbursements
FBA reimbursements deserve specific attention because they are frequently miscategorized.
When Amazon reimburses a seller for lost or damaged inventory, the reimbursement is compensation for an asset that no longer exists. The correct accounting treatment is:
- Remove the reimbursed units from inventory at their recorded cost (credit inventory, debit cost of goods sold or a dedicated write-off account)
- Record the reimbursement cash received (debit bank or accounts receivable, credit other income or a dedicated reimbursement account)
The two entries together reflect the economic reality: inventory with a certain cost was lost, and Amazon has partially compensated the seller. The net effect on income is the reimbursement amount less the cost of the lost units. For units where the cost is higher than the reimbursement, there is a net loss. For units where the reimbursement exceeds your recorded cost, there is a net gain.
Amazon’s reimbursement calculation should not be assumed to equal your landed cost. For eligible pre-order lost or damaged events, Amazon’s current policy bases reimbursement on the product’s manufacturing or sourcing cost, excluding shipping, handling, customs duties, and other costs. For eligible post-order lost or damaged events, Amazon continues to use the original order economics, generally the sales price less applicable fees. Your accounting entry should still remove the inventory at the cost recorded in your books and record the Amazon reimbursement separately.
Recording the reimbursement as product sales revenue overstates gross sales. Recording the lost inventory cost as COGS without recording the reimbursement understates income. Both errors distort gross margin and make the books harder to read.
Frequency
How often should inventory reconciliation run? The right frequency depends on volume and operational complexity.
Monthly. For sellers with significant FBA inventory or multi-location fulfillment, a monthly reconciliation is appropriate and aligns with the month-end close process. A monthly reconciliation catches discrepancies before they compound. It also produces an inventory balance that can be used for monthly gross margin analysis.
Quarterly. For lower-volume sellers with simpler inventory structures, a quarterly reconciliation is a reasonable minimum. The risk with quarterly reconciliation is that errors from earlier in the quarter are harder to trace by the time the reconciliation runs.
Before year-end. All sellers should reconcile inventory at fiscal year-end before preparing financial statements or filing taxes. A year-end reconciliation done on unreconciled books going back twelve months is time-consuming and produces lower-confidence numbers than a reconciliation run in small intervals throughout the year.
The practical standard for FBA sellers is to run the reconciliation monthly, aligned with the month-end close, because the Amazon Inventory Ledger and Reimbursement Report are readily available and the discrepancies are manageable when caught early.
Physical Counts
For sellers who hold physical inventory at their own location or at a 3PL, a physical count is an independent verification that the warehouse records match reality. The accounting records and the warehouse system may both be wrong if the underlying receiving and outbound processes have errors.
A physical count involves:
- Counting every unit at each storage location
- Comparing the count to the warehouse system or accounting records
- Investigating and recording discrepancies
Physical counts are typically done annually for smaller operations or at shorter intervals for high-value or high-velocity inventory. The count should be done when inbound and outbound activity is paused or minimal to avoid counting units in transit.
For FBA sellers, Amazon conducts its own inventory controls within fulfillment centres and may replace or reimburse eligible items that are lost or damaged. You cannot physically count FBA inventory yourself, so the Manage FBA Inventory report and Inventory Ledger are the primary verification tools.
Common Mistakes
Using the available quantity instead of total quantity. Amazon’s available quantity excludes units that are reserved, unsellable, researching, or in certain inbound states. Shopify’s Available quantity similarly excludes committed and unavailable units. The accounting system should reflect the total inventory position you own, based on the point when your workflow records inventory ownership, not just units available for purchase. Using only the available quantity will usually produce a consistent undercount.
Recording reimbursements as product revenue. This is the most common inventory-adjacent accounting error in FBA businesses. It inflates gross sales and makes gross margin appear higher than it is.
Not recording units removed from FBA. When units are removed by seller request, they may be returned to the seller or disposed of. Removed units should be reflected in inventory records on removal, not when they are eventually received back or confirmed as disposed.
Skipping reconciliation after a new product launch. New product shipments to FBA are the highest-risk period for receiving discrepancies. Amazon may receive fewer units than were shipped, and those units may be damaged in transit. Running a reconciliation shortly after a new shipment is received at FBA confirms the opening balance for the product before any sales volume makes the discrepancy harder to trace.
Applying a single average cost across product variations. If a product has multiple variations (size, colour, bundle configuration) with different costs, using one average cost for all variations will produce inaccurate COGS when the sales mix differs from the expected proportions. Each variation should have its own cost if the per-unit landed cost differs.
Related Guides
- Month-End Close Checklist for Marketplace Sellers covers the full month-end process, including the inventory step in context with platform reconciliation, COGS, and GST/HST review.
- Landed Cost for Canadian E-Commerce Sellers covers how to calculate the full per-unit cost that should be recorded as inventory value and used in COGS.
- Amazon FBA True Profitability covers how to build a profitability view that reflects accurate inventory cost, FBA fees, and advertising spend.
Scope of This Guide
This guide covers inventory reconciliation for marketplace sellers operating in Canada. It does not cover:
- Inventory valuation methods (FIFO, weighted average, specific identification) and when to use each
- Provincial retail sales tax implications of inventory adjustments
- Inventory held for resale in the US and US tax implications
- Multi-entity inventory arrangements or consignment structures
The gap between units on hand and units in the books is not a minor administrative matter. It affects gross margin, tax obligations, and the reliability of any financial analysis done during the year. A reconciliation run consistently, at the same point in each period, produces numbers that can be used. A reconciliation run once at year-end, working backward through twelve months of unresolved discrepancies, costs more and produces results that are harder to defend.