A physical count refers to the process of counting by hand the total number of specific items in a company’s inventory. It is usually performed at regular intervals, for example, at the end of each quarter, biannually, or annually, as part of a company’s inventory management procedures.
Physical counts are important for a variety of reasons:
- Inventory Accuracy: It ensures the actual inventory matches the inventory reported in a company’s accounting system.
- Identifying Shrinkage: It helps identify discrepancies, known as shrinkage, which could be due to theft, damage, miscounts, or other errors.
- Financial Accuracy: It verifies the value of the inventory, which affects the company’s financial statements, tax obligations, and other important financial metrics.
- Reordering Strategy: It assists in making decisions about reordering inventory and can help optimize inventory levels.
The physical count process usually involves:
- Planning: Selecting a date and time for the count, usually when the business is closed or activity is minimal to prevent sales from occurring during the count.
- Preparation: Organizing the inventory and count areas, and training the individuals who will be doing the counting.
- Counting: Counting the inventory, often using count sheets or handheld scanners to record the count.
- Reconciliation: Comparing the results of the physical count with the inventory records in the company’s accounting system and investigating any discrepancies.
- Adjustments: Making any necessary adjustments to the inventory records in the company’s accounting system to reflect the actual inventory on hand.
Even in the age of advanced inventory management systems, physical counts remain an important tool to ensure inventory and financial accuracy.
Example of a Physical Count
Let’s consider a bookstore, “The Reading Nook,” as an example.
- Planning: The owner of The Reading Nook decides to conduct a physical count of all books in the store on July 31, the end of their fiscal year, after the store closes for the day.
- Preparation: In the days leading up to the count, the staff organizes the books, ensuring all are in their correct places. The owner explains the counting process to the staff, ensuring everyone understands what to do.
- Counting: On July 31, after the store closes, the staff begins the physical count. They divide the store into sections, with each employee responsible for counting a specific section. They record the counts on count sheets, noting the title and number of copies for each book.
- Reconciliation: Once the count is finished, the owner compares the count sheets with the store’s inventory records. They find a few discrepancies. For example, the physical count found 12 copies of a particular book, while the inventory record shows 14.
- Adjustments: After investigating, the owner determines that two books were likely stolen, as they couldn’t find any sales or other records for those books. They adjust the inventory record to reflect the actual count of 12 books. They also adjust their financial records to account for the loss due to theft.
This is a basic example of how a physical count might be conducted in a small retail business. The exact process can vary depending on the size and nature of the business, the types of items in inventory, and the systems in place for managing inventory.