Managing inventory

Types of inventory

Most businesses will have a variety of different types of inventory. For a retail business, this will be the goods that are in inventory and held for resale. In a manufacturing business, there are likely to be raw material inventories (that will be used to make the business’s products), partly finished products (known as work in progress) and completed goods ready for sale (known as finished goods).

Now, watch the video where the Kaplan tutor talks through the process of keeping stock records and ensuring that the business knows how much stock they have at any point in time.

A summary of the video follows:

Stock take

At the end of the accounting period, the quantity of each line of inventory is counted and recorded. This is called an inventory count – also known as a stock take. The organisation will then know the number of units of each type of inventory that it has at the year end.

The physical amount of inventory held must be counted and the amounts physically on hand checked to the stores records. Any discrepancies must be investigated. This is known as a closing inventory reconciliation.

Stores records

For each line of inventory, the stores department should keep a ‘bin card’ or ‘inventory card’ which shows the following:

• the quantity of inventory received from suppliers (sourced from delivery notes or goods received notes) – this should be netted off by any goods returned to the suppliers (sourced from credit notes or despatch notes)
• the quantity issued for sale or use in manufacture (sourced from store requisitions)
• any amounts returned to the stores department (sourced from goods returned notes)
• the amount / balance of units that should be on hand at that time.

At any point in time the balance on the stores record should agree with the number of items of that line of inventory physically held by the stores department.

Possible reasons for differences

If there is a difference between the quantity physically counted and the store’s records, this could be for a variety of reasons:

• Goods may have been delivered and, therefore, have been physically counted but the stores records have not yet been updated to reflect the delivery.
• Goods may have been returned to suppliers and, therefore, will not have been counted but again the stores records have not yet been updated.
• Goods may have been issued for sales or for use in manufacturing, therefore, they are not in the stores department but the stores records do not yet reflect this issue.
• Some items may have been stolen so are no longer physically in inventory.
• Errors may have been made, either in counting the number of items held, or in writing up the stores records.

Now, we know a bit more about how the business is aware of what they have left, unsold at the period end – what we have been calling closing inventory.

If you wish, have a look at the PDF below which contains an illustration of a closing inventory reconciliation. This will give you an idea as to how any discrepancies are adjusted for.

Now the business has a total figure in units, it needs its value.

Let’s move on to discovering how these units of stock are valued.