You may have questions in your mind, how to do an inventory check? When to do it? Which method is suitable for the stock check? Etc. This post gives you the answer.

This post gives you information about one of the stock checking methods. That is annual physical inventory, and also it provides a few tips to perform this process.


Annual Physical Inventory is the process of personally checking the stocks to ensure appropriate accounting of the materials and physical existence as recorded in the company books.

This process helps the business to understand the accuracy of the company stock.

It helps in planning the delivery of goods to the customers on time. It also further enhances the inventory management system by tracking the existing materials and understanding which ones need to be ordered for smooth and non-stop production.

Thus the overall business decisions are taken with the help of this process.

Annual physical inventory process suites for small and medium organizations with fewer products. This process will not be suitable for large organizations with more products in inventory.

Because large organizations cannot shut down for a long time for physical inventory. Annual physical inventory to be done once a year.

Physical Inventory Process

Steps to perform annual physical inventory

Following are a few crucial steps to perform the annual physical inventory process.

Process planning

  • Decide the proper method to count the physical inventory. That will be the periodic or perpetual method.
  • Determine the intervals between the counts.
  • Find out the number of days or time required to count by taking the draft of a list of inventories in the stock.
  • Schedule the date for processing the inventory count. Make sure that the days you will be choosing will affect your typical work process negligibly.
  • Assign at least two people to do this process. An experienced, familiar with the warehouse person to count and another one to record the quantity.
  • Give training to the staff if they are new to the inventory counting process.
  • Inform the outside partners and staff in the company in advance. Share the scheduling date and time with them.
  • If you assign more employees to do the process as your inventory is more, make teams so that each group contains a new person and experienced employees.
  • Arrange the necessary stationeries and equipment to perform the process.
  • If you use apps or software for the counting process, upgrade them to the current version.
  • If you use an electronic instrument to do the counting, check the accuracy of the instrument.
  • Find out and assign some extra space for counting if required.
  • Instruct the employees who perform the process of handling some situations in writing.
  • Avoid data entry in the inventory management system during the counting process.
  • Stop the receiving and issuing of inventories during the process.
  • Instruct the employees to record the counts correctly to avoid double counts.
  • Utilize this time to clean your warehouse and organize it.
  •  Record the procedures that you have followed during the process.

Process execution

  • Authorized person freeze all the activities related to inventory items.
  • A list of inventories and required equipment will be provided to the employees.
  • Employees count the stocks that are assigned to them.
  • Employees record the physical count in a spreadsheet or a standard sheet.
  • The manager or supervisor compares the count data with the actual data in the system.
  • Supervisor asks the employees to recount the inventories in case of a mismatch.
  • Employees submit the changing data, if any.
  • Again manager/supervisor validates the data. If all are ok, he sends that to the accounting department.
  • An authorized person in the accounting department re-checks and approves the inventory count.
Annual Physical Inventory

Advantages of annual physical inventory

  • It allows the organization to start a fresh new year with a clean warehouse
  • It ensures the accuracy of  inventory of the organization and makes sure that  goods are not being lost
  • It gives useful information about the stock of the organization
  • It helps to improve the overall profit of the company

Disadvantages of annual physical inventory


Even though there are several benefits of using the Annual Physical Inventory, the biggest issue of this process is that it takes a lot of time for the personnel to count and check every item individually.

It also unnecessarily adds up to the human resources costs lost in actual production and, at the same time, is invested in checking the stock.

Chances of inaccuracy

No company can perform this activity often. They might do this once every quarter or a year. Once the stock is checked, it is adjusted as per the existing records.

But the critical point is that the inaccurate data prevails during the rest of the year, making this system inefficient.

The Annual Physical Inventory system comprises the essential phases: planning, execution, and report analysis.

The best-suited alternative to this procedure is the inventory cycle count, where the materials are checked on a specific day for a particular location. But, again, ABC analysis can be utilized here to make counting more efficient and reliable.

Methods of Physical Inventory

Other methods of Physical Inventory

Cycle counting

Cycle counting is one more method of counting inventory. It is a never-ending counting process. In this process, a small stock set is measured in a particular place on a specific day.

Using this method, You can daily check your physical inventory. Generally, it suits large organizations where inventory is extensive.

Following are the few benefits of the Cycle count method over annual physical inventory.

  1. Less down the disturbance in work during performing this method.
  2. Saves money and manpower because only one person can also perform this process.
  3. This process is not difficult and complex as annual physical inventory. You can do this process without any confusion.
  4. Increases the accuracy of the inventory and gives a clear idea of each line of products or inventories.
  5. Gives vision to the buyers into which component to be ordered to stock.
  6. Helps to recognize the missed sales opportunities.

Continuous Inventory

What is continuous inventory?

Continuous inventory is one of the physical inventory methods where all materials are counted at some month or point in the year. So, for example, in a bicycle spare part manufacturing company, they can count some materials in May and some in September.

In this method, counting inventories takes place throughout the year. The company has to make sure that all the materials are counted physically at least once in that year.

Inventory Sampling

In this procedure, physical counting happens only for the randomly picked materials. Any differences find when compared with the balance sheet. Then the other materials are also counted.

Get more definitions about Annual physical inventory and other ERP-related terms here.


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