Stock audit and physical count: how to do it in a day and post the differences

What is a stock audit?

A stock audit is a physical count of every product on hand, compared line by line with the quantity your records show. Where the two differ, the difference is investigated, explained and posted so the books match the shelf.

The count itself is simple. The hard part is everything around it: stopping stock from moving while you count, making sure nobody counts a rack twice, and turning a sheet of pencil marks into accounting entries that an auditor can trace.

Why should a small business count its stock?

You count stock because the value on your balance sheet is only as good as the quantities behind it. Three reasons come up again and again:

• Year-end valuation. Closing stock sets cost of goods sold and gross profit for the year. Your accountant and any statutory auditor will want evidence that the closing quantity is real.
• Theft and loss. Small, regular shortages on the same products point to pilferage, breakage or goods leaving without an invoice. Without a count you never see the pattern.
• Posting errors. A bill entered twice, an invoice raised in the wrong warehouse, or boxes entered as pieces all leave the records wrong. A count finds them, and fixing the cause stops them coming back.

Many small firms count once a year at 31 March. That is the minimum. Counting your fastest moving products more often, covered further down, catches problems while they are still small.

How do you prepare for a physical stock count?

Good preparation decides whether the count takes one day or three. Do these in the week before the count date:

• Fix the count date and the count window, for example 31 March from 9 am to 5 pm, and tell sales, purchase and the godown staff
• Post every pending supplier bill, invoice, return and transfer dated before the count, so the system quantity is complete
• Freeze postings for the count window: no invoices, bills or transfers that move stock in the warehouse being counted
• Export the stock list for each warehouse and print it, product by product, in the order goods sit on the racks
• Hide the system quantity on the count sheets, so counters write what they see rather than what they expect
• Tidy the godown the day before: like with like, damaged goods set apart, open boxes marked
• Pair counters two to a rack, one counting and one writing, and give each pair a list of racks
• Decide in advance how you will treat goods received but not billed, and goods billed but not yet dispatched

The freeze matters most. If an invoice posts in the middle of the count, the system quantity moves under you and the difference you post will be wrong by exactly that invoice.

How do you run the count on the day?

Run the count rack by rack, in a fixed order, and do not post anything until every sheet is back and checked.

1. 1

   Brief the counters

   Ten minutes at the start: the unit for each product (piece, box, kg, length), how to treat part boxes, and where damaged goods are.

2. 2

   Count and tag

   Each pair counts its racks and puts a tag or chalk mark on every counted rack, so nothing is counted twice or missed.

3. 3

   Recount the differences

   Once sheets are compared with the system list, a second pair recounts any line that differs. Most differences disappear on recount.

4. 4

   Trace the rest

   For what is left, look for the missing document: an unposted bill, a transfer recorded one side only, a unit mismatch. Post the missing document if you find it.

5. 5

   Classify the reason

   Every remaining difference gets a reason: count difference, damage, theft or loss, found stock, or expired goods.

6. 6

   Post and sign

   Post the adjustment, print the stock list as at the count date, and have the owner and the counters sign it.

What does a worked stock count look like?

Here is the 31 March count at the Main godown of Lakshmi Steel Furnitures, the fictional Coimbatore business used on this site. Six products were counted after recounts. Two came up short and one came up over.

The investigation found that one almirah was dented in loading and set aside, and one went missing. The extra cot had been missed in last year's count, stacked behind the almirahs. The 36 metres of tube, six 6 metre lengths, were used in the workshop without being issued.

Each finding changes what you do next. The missing almirah is a theft or loss. The dented one is damage. The cot is found stock, so it goes in with found as the reason. Had it been a customer return, it would need a credit note instead, because the customer's balance would be wrong too. The tube is a process gap: workshop consumption should go through a work order or an adjustment with a reason, not walk off the rack.

How does a stock difference post to the books?

A shortage reduces the Inventory account and charges the loss to an expense account at the product's average cost; an excess does the opposite. The quantity difference is multiplied by the current average, not by the selling price or the last purchase price.

Because the shortage leaves at the average, the average cost of what remains does not change. The found unit comes back in at the average too, which is the default cost for a positive line. Your gross profit for the year falls by the net loss, which is the honest result: the goods were bought, and they are not there to sell.

Why lock the period after the auditor signs?

Locking the period stops anyone from posting a back-dated document that changes the stock you just counted and signed.

Without a lock, a bill dated 28 March that someone posts in May quietly changes the closing quantity, the closing value and the profit your auditor has already signed off. Set the lock date to the count date once the count is posted and accepted. Anything found later goes in as a dated correction in the open period, where everyone can see it.

What are cycle counts and which products should you count?

A cycle count is a small count of a few products, done every week or month, instead of counting everything once a year.

Start with the top 20% of products by stock value or by sales. In most small businesses they carry most of the money, and they are where a shortage hurts. A simple rhythm works:

• Top 20% by value: count every month, a few products each week.
• Next 30%: count every quarter.
• The rest: count at year end.
• Any product that came up short last time: count again next month, whatever its class.

Cycle counts use the same method as the full count: freeze that warehouse briefly, count, recount differences, post with a reason. The year-end count then becomes a confirmation rather than a surprise.

How does SimpleERP handle a stock count?

SimpleERP records a stock count as a stock adjustment in count mode, one warehouse per adjustment. You enter the counted quantity for each product, the difference from the system quantity is worked out for you, and you pick a reason: physical count, damaged, expired, lost or found.

• Posting the adjustment moves stock and writes the journal in one step, at the product's weighted average cost.
• Posted adjustments cannot be edited. A mistake is corrected by cancelling, which reverses the entry, and the audit history keeps both.
• The stock screen shows total stock value next to the Inventory account balance, with the difference, so you can confirm the books agree after posting.
• One accounting lock date protects the counted period once your auditor signs.

Read more on the inventory management page, or see how the average behind every adjustment is calculated in weighted average cost explained.