BUS103: Introduction to Financial Accounting

There are three phases of a physical inventory: planning and preparation, execution, and analysis of results.

LEARNING OBJECTIVES

Identify the three phases of a physical inventory

KEY TAKEAWAYS

Key Points

• Physical inventory is a process where a business physically counts its entire inventory.
• In the planning and preparation period, a list of stocks which is supposed to be counted are set up. Different teams are then assigned to count the stock.
• Each team counts a specific inventory. The results are recorded on the inventory listing sheet.
• The physicial count is compared to the computer count. The company must note any discrepancies between the actual number and the computer system, recount these inventory items to determine the correct quantity, and adjust the computer inventory quantity if needed.
• Any discrepancies between the actual number and the computer system must be fixed.

Key Terms

• cycle counting: A cycle count is an inventory auditing procedure, which falls under inventory management, where a small subset of inventory, in a specific location, is counted on a specified day. Cycle counts contrast with traditional physical inventory in that a full physical inventory may stop operation at a facility while all items are counted at one time. Cycle counts are less disruptive to daily operations, provide an ongoing measure of inventory accuracy and procedure execution, and can be tailored to focus on items with higher value, higher movement volume, or that are critical to business processes.
• perpetual inventory system: Perpetual inventory or continuous inventory updates information on inventory quantity and availability on a continuous basis as a function of doing business. Generally this is accomplished by connecting the inventory system with order entry and in retail the point of sale system.

Conducting a Physical Inventory

Physical inventory is a process where a business physically counts its entire inventory. Companies perform a physical inventory for several reasons including to satisfy financial accounting rules or tax regulations, or to compile a list of items for restocking.

Most companies choose to do a physical inventory at year-end.

Businesses may use several different tactics to minimize the disruption caused by physical inventory. For instance, inventory services provide labor and automation to quickly count inventory and minimize shutdown time.

In addition, inventory control system software can speed the physical inventory process. A perpetual inventory system tracks the receipt and use of inventory, and calculates the quantity on hand. Cycle counting, an alternative to physical inventory, may be less disruptive.

A company's inventory is a valuable asset.: An inventory control system ensures that the company's books reflect the actual inventory on hand.

The Phases Of Physical Inventory

There are three phases of a physical inventory:

• Planning and preparation
• Execution
• Analysis of results

Planning and Preparation

In the planning and preparation period, a list of stocks that need to be counted is set up. Teams are then assigned and sent to count the stock.

Execution

The teams count the inventory items and record the results on an inventory-listing sheet.

Analysis Of Results

When analyzing the results, a company must compare the inventory counts submitted by each team with the inventory count from the computer system. If any discrepancies occur between the actual number and the computer system, it may be necessary to recount the disputed inventory items to determine the correct quantity. After the final amounts are determined, the company must make an adjusting entry to the computer inventory.