Activities For Accounting Inventory

by Laurie Reeves
Inventory auditing ensures that records accurately reflect the actual inventory on hand.


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Companies that make products or keep inventory on hand for retail sales must keep track of the inventory they have available for sale. Accountants also periodically adjust inventory prices so that the company's financial records correctly reflect these values. To verify the accuracy of the company's financial records against the physical inventory of assets available, accountants conduct an actual physical count of the items held in inventory. Accounting inventory activities typically occur periodically throughout the year.

Inventory Items

A manufacturer usually has more than products it sells stored in inventory. Raw materials used in merchandise creation, partially completed products -- known as work in process or WIP -- and supplies needed for production equipment repair, along with finished goods, represent the different inventory categories that require periodic physical counting. For retailers, product categorization varies between the different product types and ownership, as in situations where a retailer sells items on consignment. Before beginning an inventory count of any of these items, the accountant prints a report for validation of the physical count of the items against what the company's financial records state.

Cycle Counts

For manufacturers and retailers alike, daily, weekly or monthly cycle counts of raw materials, WIP, storeroom supplies, and finished goods or items for sale allow for periodic auditing. This type of counting usually represents a random selection of a subset of items chosen for counting within a specific location. While some managers believe that cycle counting can replace a full count of a company's inventory items if all items undergo auditing within the year, most companies prefer to use cycle counts in conjunction with a once-a-year full inventory audit.

Controls and Processes

The people who manage the inventory typically aren't the same people who count it. This allows an independent, non-biased review of the items in inventory. It also helps to find broken items, and to identify internal theft or improper inventory management procedures. During a counting of inventory, each physical item listed for counting requires authentication and identification of its location in the storeroom or warehouse. Items stored in the wrong location are moved to the location listed in the company's records during inventory process.


Dependent on how much needs to be counted, the accounting team usually manages the physical counting process of inventory. The first step involves selecting a team of non-inventory people to complete the physical counting. Reports that list inventory items by location are generated and given to two-person teams assigned to a specific area. While one person counts the physical items, the other checks the items off against the company's records. If the physical count disagrees with the book amount for a particular class of items, the class of items is recounted.

Reconciliation and Adjustments

After the completion of the physical inventory, the accountant reconciles the actual physical count against the inventory reflected in the company's records. The accountant makes adjustments as needed, adding in more items when the physical count indicates such or subtracting items from the inventory. When a huge discrepancy exists between the physical count and the records, the accountant might request that any class of item with a discrepancy undergo another physical count before making necessary adjustments. Accounting inventory activities ensure that a company's financial records don't overstate or understate its inventory as well as its gross profits, net income, stockholder's equity or retained earnings.

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