Stocktaking and Physical Inventory: Process and Variance Control

Stocktaking is the process of physically counting the inventory and comparing it with the books. It aids businesses in recognising overstocking, shortages, damage, expiry and theft, and recording mistakes.

An accurate physical inventory count also helps Indian businesses with financial reporting, GST records, inventory valuation and audit requirements.

What Is Stocktaking?

Stocktaking involves the physical counting, weighing and/or measuring of the stock that is available on a specific date.

The result of counting is compared against the data in the stock register or accounting software. The difference between the two is referred to as the stock variance.

Simple example

The business should investigate the 13 unit shortage before updating its inventory records.

Simplify Your Business Operations

Designed to give you speed, control, and accuracy in daily accounting tasks.

• Save time with automated accounting workflows
• Get 35+ detailed business reports easily
• Access your business anytime, anywhere

Unlock the Munim Advantage

Stock Counting vs Stocktaking

Stock counting is limited to counting items. Stock taking covers the complete verification and reconciliation process.

Why Is Stock Taking Important?

Regular physical inventory verification helps a business:

• Maintain accurate stock records
• Detect theft, damage and expiry
• Identify excess and obsolete inventory
• Avoid unnecessary purchases
• Reduce stockout situations
• Calculate closing stock correctly
• Prepare reliable financial statements
• Support GST and audit records
• Improve warehouse controls
• Make better purchasing decisions

Incorrect closing stock can affect the cost of goods sold, gross profit and balance sheet value.

Businesses should also review their excess and obsolete inventory regularly instead of waiting until the financial year end.

What Are the Main Stock Taking Methods?

Businesses using a periodic inventory system rely heavily on physical counts because their stock records are updated at fixed intervals.

Annual stock taking

All inventory is counted near the end of the financial year. It helps determine closing stock but may not identify errors that occur during the year.

Cycle counting

Inventory is divided into groups and counted at regular intervals.

A practical schedule may include:

• High value items: More frequently
• Fast moving goods: Monthly
• Medium value goods: Quarterly
• Low value goods: Half yearly or annually

These are practical starting points, not legal requirements. The frequency should depend on inventory value, transaction volume and risk.

Spot checking

Spot checks are useful for:

• Expensive products
• Easily portable goods
• Items with repeated shortages
• Fast moving inventory
• Returned goods
• Near expiry items
• Stock handled by several employees

How Often Should Stock Taking Be Done?

There is no single frequency for every business.

Stock should be checked more frequently when:

• Variances are increasing
• Theft is suspected
• Products expire quickly
• A warehouse changes location
• New software is introduced
• Large quantities move between locations
• Book records are incomplete

Businesses can use accounting software for inventory tracking to monitor purchases, sales, returns and adjustments between physical counts.

Stock Taking Process: Step by Step

Step 1: Define the scope

Decide:

• Count date and time
• Locations to be covered
• Inventory categories
• Employees involved
• Counting method
• Transaction cut off
• Variance approval process

The scope should cover stores, warehouses, production areas and temporary storage locations.

Step 2: Organise the stock

Before counting:

• Arrange items by SKU or category
• Label racks, shelves and bins
• Separate damaged and expired goods
• Identify scrap and wastage
• Mark empty boxes
• Clear pending receipts and dispatches
• Identify unlabelled goods

Proper warehouse inventory control reduces duplicate counts and missed items.

Step 3: Review item details

Check each item for:

• Unique SKU or item code
• Correct description
• Unit of measurement
• Pack size
• Batch or serial number
• Storage location
• Valuation rate

For example, if one carton contains 24 pieces, the count sheet should show the correct conversion.

Step 4: Set the transaction cut off

Record the last:

• Goods receipt note
• Purchase invoice
• Sales invoice
• Delivery challan
• Purchase return
• Sales return
• Stock transfer

Where possible, receipts and dispatches should stop during the count. If operations continue, every stock movement must be recorded separately.

Step 5: Assign counting teams

A practical team can include:

• One person to count
• One person to record
• One supervisor to review
• One independent employee to recount differences

Employees maintaining stock records should not be the only people verifying the same stock.

Step 6: Prepare controlled count sheets

Each count sheet should contain:

• Sheet number
• Date
• Location
• Item code
• Item name
• Unit
• Physical quantity
• Stock condition
• Counter’s signature
• Reviewer’s signature

A blind count can improve accuracy because the employee does not see the book quantity before counting.

Step 7: Count the physical stock

Depending on the product, the team may:

• Count pieces
• Weigh raw materials
• Measure liquids
• Measure fabric, cable or pipe
• Verify sealed cartons
• Scan barcodes
• Record serial numbers

A barcode inventory system can reduce item identification and data entry errors.

Step 8: Separate stock by condition and ownership

Record the following separately:

• Damaged goods
• Expired goods
• Customer returns
• Scrap and wastage
• Consignment stock
• Goods sent to job workers
• Stock at third party warehouses
• Goods in transit
• Customer goods held for repair
• Goods ready for dispatch

Stock owned by another party should not be included in the business’s closing inventory.

Step 9: Compare physical and book stock

Do not adjust differences immediately.

First:

1. Recount the item
2. Check the unit conversion
3. Review duplicate item codes
4. Match pending invoices
5. Verify purchase and sales returns
6. Check inter location transfers
7. Review damaged stock records

Step 10: Approve and record adjustments

After investigation, the business may need to:

• Enter a missing purchase
• Record an unentered sale
• Correct a stock transfer
• Update a sales or purchase return
• Correct a unit conversion
• Record approved wastage
• Write down damaged stock
• Write off confirmed losses

Every adjustment should include a reason, supporting document and approval.

How Is Stock Variance Calculated?

Quantity variance

Stock Variance = Physical Quantity − Book Quantity

• Positive result: Excess physical stock
• Negative result: Physical shortage

Variance value

Variance Value = Quantity Variance × Unit Cost

The applicable inventory cost should be used instead of the selling price.

Inventory accuracy

Inventory Accuracy = [1 − (Absolute Variance ÷ Book Quantity)] × 100

Shrinkage percentage

Shrinkage Percentage = (Book Stock Value − Physical Stock Value) ÷ Book Stock Value × 100

Practical example

A distributor has the following stock record:

Before writing off ₹3,120, the distributor should check pending invoices, customer replacements, damaged units and stock transfers.

Common Causes of Stock Variance

Frequently Asked Questions

What is the main purpose of stocktaking?

The primary objective is to determine if there is a discrepancy between physical stock and book records. It also assists in detecting shortages, excess, damaged stock and recording errors. 

Can stocktaking be done during business hours?

Yes, but receipts, sales, transfers and dispatches need to be monitored. More consistent results can be obtained by temporarily stopping stock movements.

What is a blind stock count?

A blind count is conducted in which the numbers in books are not revealed to the counter. It reduces the risk of employees copying the expected figure. 

Should every variance be adjusted immediately?

No. The major differences should be first recounted and investigated. Adjustments should be passed only after getting due approval.

How are goods in transit treated?

Their treatment depends on ownership as of the count date. Invoices, dispatch records and purchase terms should be reviewed before including them.

Can barcode scanning replace physical verification?

No. Barcodes are useful for counting and identification of items, but physical inspection remains necessary for item quantity, condition and ownership.