Stock Taking

Stock Taking is the process of physical counting of the stock items as well as verification of the same with the company's electronic records, which is generally done at the end of the year as it forms part of the company's annual audit and it might be done in the presence of external auditors of the company.

With the help of a stock taking procedure, businesses get a chance to take note of the discrepancies between the electronic records and the manual ones and report it to auditors to avoid being blamed for the ethical issues that may arise within the premises due to the mismatch in inventory count.

• Stock taking is physically counting the stock items and comparing them to the company's computerized records. It is typically performed at the end of the year as part of the company's annual audit and may be done in front of external auditors.
• Stock taking should adhere to the rules set by legislation, which mandates that the Stock be physically counted at year's end in front of external auditors.
• By conducting a stocktake, it is simple to identify discrepancies between the physical count and the financial records, i.e., whether there is a deficit of stock that may be caused by theft or another factor or an excess of merchandise that may be caused by subpar deliveries or teaming and leadership.
• Stock taking has certain challenges, such as it is a protracted and time-consuming process, the expense of stocktaking is substantial, and due to the nature and location of the Stock, conducting it might occasionally prove challenging.

A stock taking method helps businesses identify mismatches in electronically maintained inventory records by manual counting and verification. Every organization keeps inventory with them to fulfill the needs of the customers. In large organizations, management does physical verification of the stock as it gives the idea about the Stock discrepancies as per books and as per physical count.

The process of timely verification of stock is called stock checking, and if the same process of physical counting of the stock is done at the end of the year, i.e., at the balance sheet date, then the procedure is termed as stock taking. It is beneficial for any organization through which discrepancies can be pointed out and controls can be enhanced.

The reasons that make the process a must for businesses are:

• At the end of the year, as on the balance sheet date before the external auditors.
• At the time of cost, audit to verify the Stock cost.
• At the time of stock, audit to verify the reported stock’s accuracy, etc.

The objectives of stock taking include the following:

• To verify the inventory at the end of the year to present the true and fair view in the financial statements of the organization.
• To comply with the regulations governed by law as the law requires to physically count the Stock at the year-end before the external auditors.
• To keep track of physical Stock and verify the internal controls by cross-checking the Stock with the financial records.
• To point out the Stock discrepancies with financial records and accounting records.
• To impose inventory control measures.

The procedure of stocktaking is as under –

• Select the appropriate framework for noting the records.
• Select the appropriate and competent team.
• Provide various details related to Stock to the selected team.
• Frame the procedures.
• Determine the time limit for completion of it
• Assign the responsibility to the team members.
• Inform the procedure and invite the external audit team to conduct stocktaking.
• Obtain the report in a prescribed manner from the selected team and the observations and suggestions for improvement from the team of the company and a team of auditors.
• Verify the records obtained with the financial records and note any discrepancies.
• Report the discrepancies to the auditor and how the company dealt with the same.

Talking about how to do stock taking takes one to the methods or types of the process that may exist. Some of them include the following:

• Periodic stock taking: As the name suggests, the counting and verification in this case are done at regular intervals, which is mainly the accounting period of a business.
• Annual stock taking: In this case, the stock taking procedure is conducted once every year. This is normally the last month of a financial year. Though recording details annually helps, it is recommended to keep recording stock information more frequently, i.e., weekly or monthly.
• Spot or line checks: This kind of verification is either planned or unplanned. It is done while the stocks are still within the premises. It is done to ensure that the digital records and manual verification tally and has no discrepancy.
• Stock out validation: This method of stock taking is preferred when a business suspects a mismatch in the stock counting done electronically and manually. If such validations are conducted from time to time, companies remain out of the issues arising due to the discrepancies in records maintained on paper and digital platforms. This stock taking technique is also considered a better option in the event of a change of ownership.
• Perpetual stock taking: Such checks are continuously conducted, which means the verification is done multiple times a year. However, the people in charge of the process may conduct it one by one for different business segments or for the whole premise at once.

The Details of Stock of the automobile company at the end of the financial year are as under:

Stock Taking was conducted at the end of the year and found that the spare parts units were 18 units valued at $ 480,000. State the stock's value to be reflected in the financial statement and how to deal with the discrepancies in the records.

Solution

As there are discrepancies in the records as per physical count and as per financial records, the stock as per physical count is to be reflected in the balance sheet.

The difference of $ 20,000 is to be debited to the profit and loss account as the loss stock and the disclosure in the financial statement.

Conducting it is very beneficial for organizations. The importance is described as under:

• Through stocktaking, discrepancies in the physical count and as per financial records can be easily pointed out, i.e., whether there is a shortage of stock which may be due to pilferage or any other reason, or there is an excess of the Stock that may be due to bad deliveries or teaming and leading. Also, the staff involved in it can be easily identified with this.
• Internal control can be improved as it ensures the verification of the records.
• It improves the stock ordering process as the excess Stock can be less ordered.
• During a cost audit, the price of a stock through stocktaking is determined; hence decline in the value of Stock due to storage or unused Stock can be easily detectable.

The pros and cons of stocktaking are as under –

Benefits

The benefits of stocktaking are as under –

• Internal control related to the policies of the Stock can be monitored.
• Discrepancies and staff involved in the manipulation of Stock can be identified.
• Discrepancies in physical verification and accounting records can be accounted for.
• Ensures reliability in the quantity and the value of the reflected Stock.

Limitations

• It is a time-consuming and lengthy process.
• The cost involved in stocktaking is high.
• Sometimes it becomes difficult to conduct it due to the nature and place of Stock.
• There can be errors as it is a manual process.

This has been a guide to Stock Taking and its meaning. Here we explain its procedure, importance, methods, purpose, advantages, disadvantages, and an example. You may learn more about financing from the following articles –

• Inventory Control
• Inventory Conversion Period
• Inventory Valuation
• Finished Goods Inventory