Inventory counting is the process of verifying the actual quantity of stock in a warehouse and comparing them with the system's recorded figures. It is necessary because, over time, the quantities recorded in a company’s inventory system (the “computer records”) can often differ from the physical stock. Inventory counting involves manually checking items, identifying discrepancies, and adjusting the system to reflect the actual quantities.
After inventory counting, a surplus arises when the physical stock exceeds the number recorded in the system. On the other hand, a shortage arises when physical stock is less than what is recorded on the system.
Surpluses typically happen when a supplier delivers extra items or when fewer items were shipped out to customers than recorded. Although assets are higher than expected, it may indicate process gaps and could cause reputational issues, so it's important that businesses pay attention to surpluses.
Shortages typically happen when items are not properly recorded during physical disposal, are stolen, or have been over-shipped to customers. In accounting, shortages are recorded as company losses.
Depending on the company size and resources available, businesses generally use 2 methods of inventory counting: Periodic counting and cycle counting. In periodic counting, the company selects a specific date (typically the end of each month or year), where all stock movements are momentarily paused for the day, so that employees can perform a full inventory count. This method ensures a complete, accurate snapshot of stocks for reporting and accounting. However, it is labor-intensive, may disrupt daily operations, and can lead to errors if employees become tired or staffing is insufficient.
On the other hand, in cycle counting, inventory is divided into smaller batches based on a certain criteria, such as popularity or value. For example, higher value items may be counted weekly, while low value items may be counted quarterly. Cycle counting has less operational impact and maintains higher accuracy of inventory throughout the year, allowing issues to be detected promptly. However, it requires consistent effort and discipline from both the system and the staff members.
Some companies worry that employees may simply copy the system's recorded quantities onto the count sheet without actually verifying the physical stock. In order to prevent this, advance inventory counts often hide the system's recorded quantities. This method is called blind counting, and requires employees to physically count all items and fill in their count results, which are then compared against the system records by supervisors.
