What is Stock Taking?

Stock Taking

“Stock taking” or “stocktaking” refers to the process of counting and recording the amount and value of stock (inventory) held by a business. This process helps businesses verify the quantities of inventory items they have on hand against the recorded figures in their accounting or inventory management systems. Stock taking is crucial for various reasons:

• Accuracy of Financial Statements: Accurate inventory counts are vital for preparing correct financial statements, especially the balance sheet and the cost of goods sold calculations on the income statement.
• Inventory Management: It helps in identifying slow-moving items, obsolete stock, and other inventory-related issues. This can assist businesses in making informed decisions about reordering, discounting, or discontinuing certain items.
• Loss Prevention: Regular stock taking can help businesses identify and investigate discrepancies, which might be due to theft, damages, misplacements, or accounting errors.
• Insurance : Accurate stock records can assist when making insurance claims resulting from loss or damage.
• Tax Purposes: It ensures that the value of inventory reported for taxation purposes is accurate.

The Stock Taking Process:

• Preparation: Decide on a date and inform relevant staff. This might involve shutting down operations for the day or doing the count during off-hours, especially for retail businesses.
• Organization: Organize items in a manner that makes counting easier. This could involve grouping items by type or location.
• Counting: Physically count each item. Some businesses use electronic scanners or other inventory management tools to speed up the process.
• Recording: Record the counted quantities, typically on stocktaking sheets or directly into an inventory management system.
• Reconciliation : Compare the physical counts against the recorded figures in the accounting or inventory system. Investigate any discrepancies.
• Adjustments: After identifying discrepancies and determining the reasons, adjust the records in the inventory system to reflect the actual counts. This might also involve making journal entries in the accounting system to correct the inventory value.
• Review: Analyze the results of the stock take to identify potential areas of concern or patterns, like frequent discrepancies in certain product lines, which might indicate issues like theft or supplier fraud.

Stock taking can be a time-consuming process, especially for businesses with vast amounts of inventory. It’s common for businesses to perform full stock takes annually and cycle counts (counting specific parts of inventory) more frequently to maintain accurate inventory records throughout the year.

Example of Stock Taking

Let’s illustrate stock taking with a simplified example:

Scenario:

Bright Electronics Store:

Bright Electronics Store sells various electronic gadgets. The owner, Mr. Gray, decides to conduct an annual stock taking at the end of the year to ensure that the inventory on the shelves matches the records in the store’s accounting system.

• Preparation:
  Mr. Gray decides to conduct the stock taking on December 31st. He informs his employees a week in advance, so they’re prepared. He also decides to close the store on that day to avoid any sales disruptions.
• Organization:
  Before the stock take, Mr. Gray and his team ensure that all items are properly shelved and that the store is organized. They group items by categories, such as smartphones, headphones, and chargers.
• Counting:
  Mr. Gray divides the store into sections and assigns each section to an employee. Each employee is provided with a stocktaking sheet to record the counts. They physically count each item in their assigned section.
• Recording:
  By the end of the day, all employees submit their stocktaking sheets. The counts are then entered into the store’s inventory management system.
• Reconciliation:
  Mr. Gray compares the physical counts with the recorded figures:
  • Smartphones:
    • System record: 150 units
    • Physical count: 147 units
  • Headphones:
    • System record: 200 units
    • Physical count: 200 units
  • Chargers:
    • System record: 180 units
    • Physical count: 178 units
• Adjustments:
  Discrepancies are noted. After some investigation, Mr. Gray finds that two smartphones were returned to the supplier due to defects but weren’t updated in the system. One charger was also found damaged in the back storage. Mr. Gray adjusts the inventory records in the system and the accounting records to match the physical counts:
  • Smartphones: 147 units
  • Headphones: 200 units
  • Chargers: 178 units
• Review:
  Mr. Gray analyzes the results of the stock take. While the discrepancies were minor and had reasonable explanations, he decides to implement a more frequent cycle count for smartphones due to their high value. This will help in keeping tighter control over such items.

This stock taking exercise provides Mr. Gray with an accurate picture of his inventory, ensuring that his financial statements will reflect the correct value of stock on hand. It also gives him insights into potential areas for process improvement in his store.