Inventory and costing
Stock take
A stock take is the physical verification of the quantities and condition of items held in an inventory room or warehouse at a specific point in time.
What is Stock take?
A stock take, also known as an inventory count, involves manually counting all the goods your business currently holds. You compare this physical count against the records in your inventory management system to ensure they match. If the numbers differ, you have an inventory variance. A negative variance means you have less stock than expected, which could point to theft, damage, or recording errors. A positive variance means you have more stock, usually caused by unrecorded supplier deliveries or sales mistakes. Businesses typically choose between two methods. A periodic stock take requires counting everything at once, often at the end of the financial year, which usually means pausing operations. Cycle counting is an ongoing process where you count small sections of inventory regularly throughout the year, minimising disruption.
How Stock take works
To conduct a successful stock take, you need a clear plan and organised inventory. First, choose a time when stock movement is minimal, such as after business hours or during a weekend. Freeze all inventory transactions so nothing enters or leaves the warehouse while counting. Print count sheets from your system, but hide the expected quantities so staff count exactly what is on the shelf. Assign workers in pairs to count specific sections, ensuring one person counts while the other records. Once the counting finishes, enter the physical numbers into your system to identify any discrepancies. Finally, investigate large variances and post an adjustment journal entry to update your financial records.
- Organise the warehouse and label all shelves clearly before counting.
- Freeze all stock movements to prevent changes during the count.
- Print blind count sheets that do not show expected system quantities.
- Count every item physically and record the actual quantities found.
- Compare the physical count to system records to find variances.
- Adjust the inventory ledger to reflect the true physical stock levels.
Worked example
Gulf Electronics sells mobile phone chargers. The inventory system shows 500 units in stock at a cost of $10 each, meaning a total inventory value of $5,000. During the annual stock take, the staff physically count only 485 chargers on the shelves.
This creates a negative variance of 15 units (500 expected minus 485 actual). To correct the records, the business must reduce its inventory count by 15 units. The lost value is $150 (15 units multiplied by $10). Gulf Electronics posts an adjustment to decrease the inventory asset account by $150 and increase the cost of goods sold or inventory shrinkage expense by $150.
Why it matters for your business
Accurate stock takes are essential for reliable financial reporting and healthy cash flow. If your system overstates inventory, you might fail to reorder crucial items, leading to stockouts and lost sales. If it understates inventory, you risk tying up working capital by ordering goods you already have. Regular counting also helps you identify theft, spoilage, or poor warehouse management early. Correct inventory values ensure your balance sheet and profit and loss statement reflect reality, which is vital for tax compliance and securing loans. Paper & Pen tracks your stock levels automatically, making it easier to spot discrepancies during your count.
See also
Questions
Common questions
How often should a business do a stock take?
What causes an inventory variance?
Related terms
- Inventory turnover Inventory turnover is a financial metric that measures how many times a business has sold and replaced its total stock of goods over a specific period, usually a year.
- Stock Keeping Unit A Stock Keeping Unit is a unique alphanumeric code assigned to a specific product variant to track inventory levels, sales and locations within a business.
- Safety stock Safety stock is an extra quantity of inventory kept on hand to prevent stockouts caused by unexpected surges in customer demand or sudden delays from suppliers.
- Cost of goods sold Cost of goods sold is the total direct expense incurred to produce or purchase the items that a business successfully sells during a specific accounting period.
- Backorder A backorder is a customer request for a product that is currently out of stock but is expected to be replenished and delivered at a later date.
- Bill of materials A bill of materials is a comprehensive list of the raw materials, components, and instructions required to construct, manufacture, or repair a finished product.