Businesses that maintain inventory use inventory systems to manage the inventory levels in the warehouse as well as in the plant. Such companies need to decide between using period inventory systems and perpetual inventory systems. With either system, the company still needs to take a physical inventory at least once per year. A physical inventory provides a couple of benefits for the management of the business.
Inventory systems meet the needs of a business by providing information regarding inventory quantities and dollar values. Many inventory systems provide information regarding the specific warehouse location of the inventory and the quantity held in that location. Plant employees and managers use this information to locate specific items for shipping to customers or to determine if the company needs to reorder a specific inventory item because the available inventory has decreased. Inventory systems also provide information to the accounting department regarding the total inventory value owned by the company.
A perpetual inventory system updates each time the warehouse receives inventory from vendors as well as each time the warehouse ships inventory to a customer. The perpetual inventory system provides the inventory balance at any point in time. This balance continually updates. Many companies use scanners and bar codes to easily record changes in inventory balances. These companies scan pieces of inventory when they ship or are received, which automatically updates the balance in the inventory system.
A physical inventory consists of manually counting each inventory item and comparing it to the quantity recorded in the inventory system. Some companies separate employees into two groups, with one group counting each item and the second group recounting each item. This allows the company to compare the two counts to the quantity recorded in the system and identify potential inventory problems. A physical inventory count allows the company to correctly determine inventory quantities, identify necessary inventory adjustments and investigate variances.
Sometimes companies discover discrepancies between the actual quantities in the inventory and the recorded inventory. When this occurs, the company records an inventory adjustment to correct the inventory balance in the system. Adjustment quantities arise from comparing the actual quantity to the system quantity. The purpose of the inventory adjustment is to make the inventory system equal the actual inventory owned by the company.
After performing a physical inventory, a company investigates the quantity variances discovered to determine the reason for the variances. Variances typically arise as a result of employee errors, theft or destruction.
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.