Last reviewed: July 2026.
Stocktaking is the controlled process of physically counting inventory and reconciling the result with accounting records. A reliable stocktake supports quantity accuracy, cut-off, ownership, condition and valuation under IAS 2.
Counting alone is not enough. The final inventory balance must include goods owned by the entity, exclude goods owned by others, use appropriate costs and reflect damage or net realisable value problems.
Objectives of a stocktake
- confirm inventory quantities and locations;
- identify damage, obsolescence and slow-moving items;
- test the completeness and accuracy of inventory records;
- support purchase and sales cut-off;
- detect loss, theft and process errors;
- provide evidence for IAS 2 valuation and financial reporting.
Stocktake stages
| Stage | Main action | Evidence |
|---|---|---|
| Planning | Define locations, teams, count date, instructions and cut-off rules. | Approved stocktake plan and location map. |
| Count preparation | Freeze or control movements, tidy locations and identify obsolete goods. | Movement log, pre-numbered count sheets or device controls. |
| Physical count | Independent count and check teams record quantities without guessing. | Signed count records and exception notes. |
| Reconciliation | Compare physical quantities with system records and investigate differences. | Variance report and approved adjustments. |
| Valuation review | Test cost, NRV, damage, obsolescence and ownership. | Invoices, costing records, sales data and impairment review. |
Planning the count
Prepare written instructions before the count. Identify warehouses, production areas, goods in transit, third-party locations, consignment stock and inventory held for customers. Assign staff who are independent of normal custody where practical.
Decide whether operations will stop or continue under controlled movement procedures. Set rules for unopened packages, bulk quantities, work in progress, damaged goods and duplicate counts.
Count sheets and digital devices
Count records should be pre-numbered or system-controlled. Ideally, counters do not see recorded quantities during the first count because “blind counts” reduce confirmation bias.
Each record should identify item code, description, unit of measure, location, quantity, condition, counter, checker and time. Missing and unused count sheets must be accounted for.
Inventory movement and cut-off
Goods received and dispatched near the count date create cut-off risk. Record the last goods received note and goods dispatched note before the count and the first documents after it.
Inventory included in the physical count must be matched to the correct accounting period. Ownership normally depends on contract terms and control, not simply physical location.
Review the source documents guide for purchase and sales evidence.
Goods held by third parties
Obtain confirmation for inventory held at external warehouses, processors or consignment locations. Evaluate the reliability of the third party and reconcile confirmations to the inventory ledger.
Goods physically held for another party should be counted separately and excluded from the entity’s inventory unless the entity controls them under the applicable facts.
Damaged and obsolete inventory
Separate and label damaged, expired, obsolete and slow-moving goods. Obtain evidence of expected selling prices, completion costs and selling costs.
IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Write-downs and inventory losses are recognised as expenses when they occur.
See the IAS 2 cost and NRV guide.
Reconciliation and variance investigation
After the count, compare physical quantities with system records. Recount significant differences before adjusting the ledger. Investigate timing, unit-of-measure errors, duplicate item codes, unrecorded movements, production issues and possible theft.
Adjustments should be authorised and retain a clear audit trail. Analyse recurring differences by item, location, employee and process.
Worked stocktake adjustment
The inventory ledger shows 1,250 units at 12 CU each. The physical count finds 1,210 units. Ten units are damaged and can be sold for 5 CU each after selling costs of 1 CU.
- Quantity shortage: 40 units × 12 CU = 480 CU expense.
- Undamaged inventory: 1,200 units × 12 CU = 14,400 CU.
- Damaged inventory NRV: 10 × (5 − 1) = 40 CU.
- Total closing inventory: 14,440 CU.
The original ledger amount was 15,000 CU, so total reduction is 560 CU, combining the shortage and NRV write-down.
Cycle counting versus annual counting
Cycle counting tests selected items throughout the year and can improve record accuracy. High-value, fast-moving or high-risk items may be counted more frequently.
A strong cycle-count programme may reduce year-end disruption, but it requires reliable perpetual records, controlled movements, complete coverage and prompt variance investigation.
Connection to cost of goods sold
Closing inventory directly affects cost of goods sold and gross profit. Overstated closing inventory understates cost of goods sold and overstates profit; understated inventory has the opposite effect.
Reconcile stocktake adjustments to the general ledger and review their impact on margins, tax and management reports.
Computerised inventory controls
- restrict item creation and unit-of-measure changes;
- use barcode or serial tracking where appropriate;
- approve negative-stock overrides;
- reconcile inventory modules to the general ledger;
- review interface and exception reports;
- protect count uploads and adjustment journals.
The accounting software controls guide explains access, integration and audit-trail risks.
Common stocktaking mistakes
- counting without controlling inventory movements;
- including consignment goods owned by another party;
- ignoring goods in transit or at third-party locations;
- using recorded quantities instead of independent counts;
- adjusting differences without investigation;
- counting quantities but not reviewing condition and NRV;
- failing to test sales and purchase cut-off.
Key takeaway
A good stocktake links physical quantities, ownership, cut-off and IAS 2 valuation. Plan the count, control movements, investigate variances and reconcile every approved adjustment to the ledger.
Official references: IAS 2 Inventories and IAS 2 implementation support.