Taking a physical inventory involves counting and verifying all goods on hand at a specific point, typically year-end, to ensure accuracy in financial records. This is critical for several reasons:
In a perpetual system, ongoing records may contain errors (e.g., unrecorded sales, theft). A physical count reconciles book records with actual stock, as seen with Mead Electric’s generator example.
In a periodic system, no real-time tracking exists, so a year-end count determines ending inventory and COGS (e.g., The Kitchen Counter counts 12 food processors to calculate costs).
Inventory is a major asset, and COGS is a significant expense. Accurate counts ensure reliable balance sheets and income statements, as Dillard’s manages $1.4–$1.5 billion in inventory to support $6 billion in sales.
Knowing exact stock levels helps avoid stockouts or overstocking, critical for retailers like Dillard’s to meet customer demand.
Physical counts reveal shrinkage (losses from theft, damage, or errors), prompting adjustments to records. The process may occur during nonbusiness hours to avoid sales disruptions, ensuring a proper cutoff between periods.