Stock Taking Meaning
Stock Taking is the process of physical counting of the stock items as well as verification of the same with the company’s electronic records which is generally done at the end of the year as it forms part of company’s annual audit and it might be done in the presence of external auditors of the company.
Every organization keeps inventory with them so as to fulfill the needs of the customers. In large organizations, management does physical verification of the stock as it gives the idea about the discrepancies of the stock as per books and as per physical count. The process of timely verification of stock is called stock checking, and if the same process of physical counting of the stock is done at the end of the year, i.e., at the balance sheet date, then the procedure is termed as stock taking. It is beneficial for any organization as through which discrepancies can be pointed out, and controls can be enhanced.
Purpose of Stock Taking
- To verify the inventory at the end of the year so as to present the true and fair view in the financial statements of the organization.
- To comply with the regulations governed by law as the law requires to physically count the stock at the year-end before the external auditors.
- To keep track of physical stock and to verify the internal controls by cross-checking the stock with the financial records.
- To point out the discrepancies of the stock with financial records and accounting records.
- To impose inventory control measures.
The procedure of Stock taking is as under –
- Select the appropriate framework for noting the records.
- Select the appropriate and competent team.
- Provide various details related to stock to the selected team.
- Frame the procedures.
- Determine the time limit for completion of it
- Assign the responsibility to the team members.
- Inform the procedure and invite the external audit team to conduct of stock taking.
- Obtain the report in a prescribed manner from the selected team and also the observations and suggestions for improvement from the team of the company as well as a team of auditors.
- Verify the records obtained with the financial records and note the discrepancies, if any.
- Report the discrepancies to the auditor along with how the company dealt with the same.
Example of Stock Taking
The Details of stock of the automobile company at the end of the financial year is as under:
Stock Taking was conducted at the end of the year and found that the units of spare parts were 18 units valued at $ 480,000. State the value of the stock to be reflected in the financial statement and how to deal with the discrepancies of the records.
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As there are discrepancies in the records as per physical count and as per financial records, hence the stock as per physical count is to be reflected in the balance sheet.
The difference of $ 20,000 is to be debited to the profit and loss account as the loss stock along with the disclosure in the financial statement.
When Should Stock Taking be done?
- At the end of the year, as on the date of the balance sheet before the external auditors.
- At the time of cost, audit to verify the cost of the stock.
- At the time of Stock, audit to verify the accuracy of reported stock, etc.
Conducting it is very beneficial for organizations. The importance is described as under –
- Through stock taking, discrepancies in the physical count and as per financial records can be easily pointed out, i.e., whether there is a shortage of stock which may be due to pilferage or any other reason or there is an excess of the stock which may be due to bad deliveries or teaming and leading. Also, with this, the staff involved in it can be easily identified.
- Internal control can be improved as it ensures the verification of the records.
- It improves the stock ordering process as the excess stock can be less ordered.
- As during cost audit, the price of a stock through stock taking is determined; hence decline in the value of stock due to storage or unused stock can be easily detectable.
The benefits of Stock taking are as under –
- Internal control related to the policies of the stock can be monitored.
- Discrepancies and staff involved in the manipulation of stock can be identified.
- Discrepancies in physical verification and accounting records can be accounted for.
- Ensures reliability on the quantity and the value of the reflected stock.
- It is time consuming and lengthy process.
- The cost involved in stock taking is high.
- Sometimes it becomes difficult to conduct it due to the nature and place of stock kept.
- There can be errors as it is a manual process.
This has been a guide to Stock Taking and its meaning. Here we discuss the procedure, examples, importance, along with benefits and disadvantages. You may learn more about financing from the following articles –