Year End Inventory Count And Accounting Procedures

Year End Inventory Accounting

To ensure that reported figures for inventory, cost of sales and other expenses are accurate and complete, certain procedures must be carried out at the end of each accounting period as well as Year End Inventory Accounting. It is essential that good internal controls be instituted to ensure that inventory is protected from fraud or loss and that inventory figures are complete and accurate. This section examines the physical count, end-of-year cut-off and essential reconciliation procedures.

Physical count

Under the periodic method, inventory must be counted at the end of each accounting period to determine the value of closing inventory. Periodic counts are made under the perpetual method to verify the accuracy of recorded quantities for each inventory item, although not necessarily at the end of the reporting period, if inventory differences are historically found to be immaterial.

The way in which the physical count is conducted will depend on the type of inventory and the accounting system of the entity. Stockpiled inventory such as mineral sands may require the use of surveyors to measure quantities on hand and assay tests to determine mineral content.

The following are some steps that are generally taken to ensure the accuracy of a physical count:

• The warehouse, retail store or storage facility should be arranged so as to facilitate counting and clearly segregate non-inventory items.

• Cut-off procedures should be put in place and final numbers of important documents such as dispatch notes and invoices are recorded. (Cut-off procedures are discussed in greater detail in section 9.5.2.)

• Prenumbered count sheets, tags or cards should be produced detailing inventory codes and descriptions. A supervisor should record all numbers used and account for spoiled documents to ensure that the count details are complete. Alternatively, where inventory items have bar codes, electronic scanners can be used to record the count.

• Counting should be done in teams of at least two people: one counter and one checker. All team members should sign the count records.

• Any damaged or incomplete items located during the count should be clearly listed on the count records.

• The supervisor should ensure that all goods have been counted before the count sheets are collected.

Perpetual method

Once the physical count is complete, under the perpetual method the quantities on hand are then compared to recorded quantities and all discrepancies investigated. Recording errors cause discrepancies; for example, the wrong code number or quantity might have been entered, or a transaction might not have been processed in the correct period. Alternatively, discrepancies may reveal losses of goods caused by damage or fraud. Recording errors can be corrected but the value of goods that have been lost should be written off . Unless they are immaterial, inventory losses must be disclosed separately in the notes to the financial statements.

Periodic method

Once the count is completed, under this method the count quantities are then costed and the value of inventory brought to account. This adjustment can be done in a number of way.

Under the periodic method, inventory losses and fraud cannot be identified and recorded as a separate expense. The movement in inventory balances plus the cost of purchases is presumed to represent the cost of sales during the reporting period.

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