Outlining the Fundamentals of Physical Inventory

The following short dialogue between consultant Julia and inventory manager Finn introduces the unit on physical inventory in Inventory Management.

Physical inventory is a business process where actual stock quantities are counted and then compared against the inventory records in the system. This ensures that the physical stock on hand matches the book inventory.

The process covers:

• Company-owned stock in the following stock types:

  • Unrestricted-use stock
  • Quality inspection stock
  • Blocked stock

• Special stocks, including:

  • Customer consignment stock
  • Supplier consignment stock
  • Returnable packaging

There are two main reasons:

1. Legal Compliance

   In many countries, companies are legally required to perform a physical inventory to validate the stock values reported in their financial statements.

2. Operational Accuracy

   Accurate stock data is essential for internal processes such as:

   • Material Requirements Planning (MRP)
   • Sales and order fulfillment
   • Procurement and production planning

1. The process begins with creating a physical inventory document that lists the stock management units to be counted.

2. The physical inventory sheet is then printed to support the counting process.

3. The actual physical inventory count is performed for the selected stock management units.

4. The results of the physical count are then entered into the system for each stock management unit.

5. After the physical count results are entered into the system, any discrepancies between the counted quantities and the book inventory quantities are reviewed.

6. There are two ways to handle these differences:

   1. Post Inventory Differences Directly

      If the differences are confirmed, they can be posted immediately in the system. This updates the book inventory to reflect the actual counted quantities.

   2. Recount Before Final Posting

      If the differences are unexpected or seem inaccurate, a recount can be initiated. The physical inventory can be repeated until the final count is verified and accepted.

      Recounts are especially useful when discrepancies are large or could impact financial reporting or operational planning.