The end of the year is nearing and preparations for stock-taking or physical inventory are gaining momentum at companies. It often seems that checking inventories properly and smoothly is merely a nuisance for accountants, a job that gets in the way of the company’s usual activities for a few hours or days. But actually, stock-taking isn’t only the accountant’s concern: by placing emphasis on the important things, stock-taking can be organised more efficiently and reasonably.
The requirements for performing a physical inventory are set out in the Accounting Act and the public sector’s financial reporting guidelines, but the bulk of the material is found in internal regulations (accounting policies and procedures and other internal procedures etc.). Every organisation is different in terms of its stocks and assets, which makes it important to document the principles of warehouses and stock-taking in internal documents.
- make sure that inventories/assets exist
- compare the inventories/assets with financial accounting data
- document surpluses or deficits in stocks and correct data
- determine whether the conditions for storage and use of inventories are fulfilled or not
- detect any deficiencies and fraud
Stock-taking quality depends on preparation for and performing of the physical inventory. In the following, I will provide an overview of what to devote attention to while performing it.
15 guidelines for stock-taking
- Selecting the date for stock-taking. The farther away from the balance sheet date the physical inventory is performed, the greater the risk that there will be discrepancies in the period between the inventory count and the balance sheet date. The date is also important in light of the organisation's level of activity, as constant turnover of goods makes it harder to perform a count.
- Warehouse condition. Goods must be properly kept, guarded and their storage conditions guaranteed. A disorganised warehouse makes it harder to perform an inventory count, increases the risk of counting errors and complicates everyday warehouse movements.
Similar items should be located in the same location. If different locations need to be used, one should make sure that information is known to the staff involved in stock-taking (location-based). During the inventory count, spoiled, damaged or unfit inventories must also be documented.
- Movements of goods during stock-taking. There should be no movements of inventory items during stock-taking. If this cannot be avoided, the incoming and outgoing goods should be factored in. Note: Movements between warehouses also affect the counting process.
- External warehouses.Stock-taking must include all of the company’s warehouses and locations, including external warehouses and goods held by other parties.
- Goods with a different owner. Goods with a different owner must be clearly separated from the organisation’s/company’s own merchandise to prevent errors in the inventory.
- Familiarity with the goods being inventoried. The staff conducting the physical inventory must be familiar with the merchandise (similar articles must not be confused). This reduces the risk of counting errors and fraud. A person responsible for the goods may simply show the counters the wrong item.
- Sequence in which inventories are counted. Goods must be inventoried in physical sequence (i.e. based on the principle of wall to wall). If this is not possible or efficient, a different principle for counting should be established.
- Marking counted goods. To avoid double-counting or leaving goods uncounted, the goods that have already been counted must clearly be marked.
- Stock-taking method. Weighing, measurement and counting must all be reliable. If the counting does not take place by piece, but rather on a different basis, the principles must be documented and as specific as possible. If needed, consider including specialists in the process.
- Accounting for sealed packages. If it is not expedient to count the contents of a sealed package piece by piece, the principle must be documented in internal instructions. The organisation/company must have certainty that the sealed packages are not empty.
- Manual counts vs. scanning codes. If a scanner is used, that does not mean that barcodes are necessarily correct (a comparison must be performed with the label/product). If the goods are manually counted, the person may accidentally record the wrong quantity or mix up articles. Scanning is certainly more automated and the risk of counting errors is lower.
- Counting sheets. The document used to tabulate the results of the count must not include the book balance of inventories. This will reduce the possibility of manipulation of results.
- Filling in the counting sheets. Inventory data must be entered into lists indelibly to minimise the possibility of manipulating results. Corrections to the lists must be made by striking out an entry, and if scanners are used, by adding a correction row.
- Checking and supervising the work of the stock-taking staff. The stock-taking committee must be as independent as possible yet familiar with the goods. In order to simplify the inventory checking, the person responsible for the goods in stock must be present for the counting so that they can assist if necessary. The counting process must be controlled and controllable. At the end of the inventory count, all counting sheets must be gathered up.
- Larger discrepancies than expected. Counting errors can be avoided by using parallel counting performed by a team consisting of multiple members. If there are too many errors, a new inventory must be organised.
Stock-taking does not end with a count
At the end of a physical inventory, differences between the financial accounting data and the actual balance usually occur. Consequently, the stock-taking is not over yet; it should be followed by an analysis of the result. But in an organisation where activity is coordinated the differences cannot be shockingly great.
Natural losses also occur depending on the organisation’s field and specifics. When goods come in and go out, articles may become mixed up or some items can go missing during the production process. Nor are arithmetic errors ruled out during counting. Many of the people who have served on stock-taking committees have become smarter due to their experience. Such aspects learned include the need for numbering counting sheets before starting the inventory. Following such rules will prevent resource-intensive errors.
If the results seem unnatural with discrepancies that are unjustifiably large, this points to poor quality of stock accounting or the stock-taking itself. Visit the following article to learn about how fraud and theft is detected during stock-taking.
If stock-taking was performed in a substandard manner, the need to perform a second stock-taking needs to be considered. Stock accounting should take place every day to ensure that the inventory count serves the purpose of verification, not accounting.