You may have questions in your mind, how to do an inventory check? when to do? which method is good 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 gives 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 of the same 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 also understanding which ones need to be ordered for a smooth and non-stop production.

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

This 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 they cannot shut down for a long time for physical inventory. Annual physical inventory to be done once a year.

Steps to perform annual physical inventory

Following are the few important steps to perform the annual physical inventory process

  • 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
  • Schedule date for the process and inform all the staffs 
  • Divide the process of counting to make it more appropriate
  • Record the counts properly to avoid double count
  • Utilize this time to clean your warehouse and organize it
  •  Record the procedures that you have followed during the process

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

Disadvantages of annual physical inventory

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

It also unnecessarily adds up to the manpower costs that are 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. This might be done once every quarter or a year. Once the stock is checked it is adjusted as per the existing records.

But the important point is that during the rest of the year the inaccurate data prevails which makes this system not very efficient. The Annual Physical Inventory system comprises the 3 most important phases being: 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 specific location. ABC analysis can be utilized here to make counting more efficient and reliable.

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 set of inventory is counted in a particular place on a particular day.

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

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. For example, in a bicycle spare part manufacturing company, they can count some materials in May and some materials in September.

In this method, counting of 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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