Inventory Counting: Process & Methods

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  • 0:05 Inventory Defined
  • 0:26 Why Take Inventory?
  • 1:33 How to Take Inventory
  • 3:19 Misstating Inventory
  • 4:14 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

It is important for any business to know how much and what types of items that they have available to sell. In this lesson, you will learn what inventory is, how to count it, and why it is important.

Inventory Defined

Can you count? If you answered yes, then guess what? You have already mastered the biggest part of taking a physical inventory count! The first thing that I need to do is to explain to you exactly what I am talking about when I use the term inventory. Inventory is the items on hand that are considered assets to a business and are used to bring in income.

Why Take Inventory?

Taking inventory really is a time consuming job, so why do it? Is it really that important? It most certainly is! Inventory is an asset. An asset is something that a company owns that has value and can be used to create revenue. If the amount of inventory that a company has is incorrect, then the total amount of assets that the company has will also be incorrect, as will the total amount of income that a company reports on its financial statements.

Inventory that is overstated, meaning that the amount of inventory reported is more than what is actually on hand, results in net income being overstated. Net income is the amount of money that a company made in a given time period after all expenses have been deducted. If net income is overstated, then it looks like the company made more money than it actually did.

On the other hand, if inventory is understated, meaning that the amount of inventory that is reported is less than what is actually on hand, then net income is also understated. This means that it looks like the company makes less money than it actually did. In order to ensure accuracy in inventory, a physical count of the inventory must be taken.

How to Take Inventory

Planning is the number one key to success when it comes to taking inventory, but what exactly do you plan for? A number of things. The first thing to do when preparing for an inventory count is to make sure to preview inventory, or to look over reports of what is supposed to be in inventory. Most companies have an automated inventory system that allows for users to see what the computer says is in inventory. Even if a company doesn't have an automated system, there are records of what is supposed to be in their inventory.

After reviewing what should be in inventory, management should make sure that grouping occurs. Grouping means that all categories of items are grouped together in their appropriate location. For example, in a clothing store, all short sleeve shirts should be grouped together by maker, size, and color. The same is true for any other items carried by the store. Doing this before the actual process of inventory counting helps to ensure that everything is counted as accurately as possible.

Once this is done, it's time to create counting teams and counting lists. Counting teams are those individuals who will be counting specific items, while counting lists are the items that will be counted. Knowing who is counting what allows management to track accountability of the numbers turned in and keeps counters from performing redundant counts on the same items. It also allows members of the counting team to know what they are supposed to count.

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