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Article Series: Accounting
Home & Small Business Accounting
How
To Record Merchandise Inventory
for Financial Statements
One
of the most important steps in the preparation of financial
statements is the obtaining of accurate inventory
figures. There are a number of methods of keeping perpetual
or book inventories, but a really accurate inventory can be
obtained only by counting all the merchandise on hand - a physical
inventory. If a book inventory has been kept also, a comparison
of the two inventories may reveal inventory shortages or overages.
Many small merchants, however, do not want to take on the
clerical work of maintaining perpetual inventory records. At
the same time, they do not feel that a physical inventory every
month is justified. In such cases, the inventory can be estimated
for monthly statements and a physical inventory taken only
at the end of the year.
How
often should you take a physical inventory and actually
count the items on your shelves? That depends on the type of
business you are in and whether you also have a reliable book
inventory system. In all cases, a physical inventory should
be taken at least once a year, usually as of the close of your
fiscal year. If accurate book inventories cannot be maintained,
a monthly physical inventory may be needed for financial statements.
In some businesses or departments where turnover is rapid,
a weekly physical inventory is helpful, although usually such
an inventory would not be converted to dollars
To ensure accuracy in counting, care should be taken to see
that merchandise is in good order in the shelves, bins, or
compartments. It is often impractical to try to take an accurate
inventory during business hours, so the actual counting must
usually be done in the evening or over a weekend. However,
the orderly arranging of merchandise, instructions to the counters,
and perhaps the counting of reserve stock should be done ahead
of time.
A part of your planning for taking inventory
should be to establish shipping and receiving "cutoffs" -
that is, to make certain that all items entered in your books
as
purchased before the inventory have been received and are counted,
if still on hand; and second - that all items recorded as sold
before the inventory are removed and not counted. If the type
of merchandise you are counting requires weighing or any other
kind of measuring, the equipment that will be needed for this
should be on hand.
In some types of business, a complete description of each
item by brand, container size, and so on is needed. In these
cases, inventory tally sheets showing this information should
be prepared in advance, so that the only writing necessary
is to record the quantities counted. These sheets should have
space for inserting the unit prices and extending the dollar
value of the stock. The order of the items on the list should
follow as closely as possible the order in which the stock
is arranged in the store. Separate sheets should be prepared
for separate departments.
If you think you do not need tally sheets,
you can take inventory on "tags." A tag is placed
with each different item in stock before the count. The description
of the item and
the number of units in stock are then entered on the tag by
the counters. Here, too, it is advisable to have a space on
the tag for the price and extension.
If a great many tags or tallies are used, they should be numbered.
This is necessary to make sure that none are lost or misplaced
after the count is made and before the final summarizing of
the inventory valuation. Tag or tally numbers can also be used
to identify the department involved. In some cases, a complete
description of the items is not necessary; the number of items
and the price might be enough for the counters to enter. # # # # # SolveYourProblem.com : 2007
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