Physical inventory procedures

3. Executing a physical inventory

There are some rules you need to follow to achieve an accurate and effective count:

  • An employee who supervised or performed a physical inventory process must be an independent person. It means that an independent person cannot be responsible for check in and sign receiving reports, for the daily security and accountability of the inventory. You should rotate your personnel so they count the areas for which they are not responsible directly. You can use the third party inventory services to be sure of independence of your staff (particularly if you suspect an internal theft).
  • Counting employees should not be given access to the inventory quantities recorded in the accounting records. This is called a blind count and helps to eliminate guessing on the part of counters, as they would not know what the quantity is.
  • Stop your business operations (inventory transactions) on the day of counting or exercise proper control over movement of inventories. Do not make any movement of items/products either into or out of the warehouses (even if they are misplaced). Do not fill orders or receive goods during the count process. There is a great risk of missing any items or their double count.
  • Proper control over count cards (tags) / sheets is needed. Ensure that all cards / sheets issued to counting teams are sequentially numbered, accounted for and returned after the counting process is finished including those which were voided or unused. Also each tag may have two (or three) copies, one of which is left on the counted inventory and one is returned to Finance to enter into the system.
  • Immediately compare your counts with accounting records, audit the counts and conduct recounts if there are unacceptable differences (i.e. deviation from accounting records is greater than a defined threshold in dollars or units as stipulated in the company's policy).
  • Mark counted items and locations. This will allow you to ensure inventory completeness (i.e., no missing items or items counted twice), which is an important aspect of any physical inventories.

When verifying your counts, pay special attention to fast-moving and volume items. Such items usually have a greater risk of counting errors in comparison to slow-moving items.

As soon as you or other responsible employee verifies that the counts in the warehouses are accurate, the quantities can be entered in your computer. If you find several counting errors in an area, the entire section should be recounted. When verification is successfully completed, all counts are entered into the computer.

The next step you need to do is to print the discrepancy reports and review it thoroughly. Sometimes errors could be made when counts are entered in your computer system; for instance, there may be a posting error or a measure error such as an item is counted in tons, pieces or meters, but is maintained in units in the system.

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