How to ensure a proper inventory cutoff

The physical inventory counting process is highly dependent on a stationary inventory.  This means that there can be no movement of inventory into or out of the warehouse area during the counting process, nor can there be a movement of any related paperwork. If this basic rule is not followed, you will have great difficulty in determining the true value of the ending inventory, because the quantities were in flux during the count.  This section contains sample procedures that are applicable in most situations for ensuring a proper period-end cutoff of all inventory-related transfers.  The procedures cover receiving, central stores, and the finished goods storage area.  They are:

Receiving and receiving inspection

  • No paperwork or parts will be forwarded to the central stores area later than 11:00 A.M., October 26.  This will allow paperwork to be processed and stock put away.
  • Beginning October 15, all receivers processed by receiving inspections must be stamped “Before Inventory.”

Central stores

  • Receipts.  All paperwork on parts received from receiving inspection must be transferred to data processing before 4:30 P.M. Friday, October 26.
  • Issues.  The paperwork on all issues to open orders and jobs in process must be completed and sent to data processing before 4:30 P.M., Friday, October 26.  On issues for sales orders, the issue documents and parts must be in the staging area or shipping area before 3:30 P.M., Friday, October 26.

Finished goods area

  • Staging area.  If parts are not shipped before 3:30 P.M., Friday, October 26, they will be retained as part of the storeroom inventory.
  • Receipts.  Receipts into the finished goods area must be received and the paperwork sent to data processing before 4:30 P.M., Friday, October 26.  The warehouse manager must ensure that all finished units are properly stored and that all related paperwork is sent to data processing before the 11:00 A.M. cutoff.
  • Issues.  On issues for sales orders, the issue card and parts must be in the staging or shipping areas before 11:00 A.M., Friday, October 26.  For issues to orders and job numbers, all paperwork on issues to work-in-process must be in data processing before 4:30 P.M., Friday, October 26.

The preceding procedures are intended for those companies using traditional paper-based transactions that are centrally recorded into the inventory database.  If a more advanced system is in place where the materials management staff enters transactions directly into the inventory database either through local terminals in smaller batches or individually with radio frequency scanners, you can enter transactions until just a few moments before the beginning of the physical inventory count.  Thus, advanced data entry systems allow a company to minimize the time period during which inventory cannot be moved during a physical inventory count.

Related Courses

Accounting for Inventory 
How to Audit Inventory