Stock Taking Meaning Example Procedure Of Stock Taking

Stock Taking Meaning

Explanation

Every organization keeps inventoryInventoryDirect material inventory, work in progress inventory, and finished goods inventory are the three types of inventories. The raw material is direct material inventory, work in progress inventory is partially completed inventory, and finished goods inventory is stock that has completed all stages of production.read more with them to fulfill the needs of the customers. In large organizations, management does physical verification of the stock as it gives the idea about the Stock discrepancies 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 sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more date, then the procedure is termed as stock taking. It is beneficial for any organization through which discrepancies can be pointed out and controls can be enhanced.

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Purpose of Stock Taking

To verify the inventory at the end of the year to present the true and fair view in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more 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 verify the internal controls by cross-checking the Stock with the financial records.To point out the Stock discrepancies with financial records and accounting records.To impose inventory control measures.

Procedure

The procedure of stocktaking 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 itAssign the responsibility to the team members.Inform the procedure and invite the external auditExternal AuditExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more team to conduct stocktaking.Obtain the report in a prescribed manner from the selected team and the observations and suggestions for improvement from the team of the company and a team of auditors.Verify the records obtained with the financial records and note any discrepancies.Report the discrepancies to the auditor and 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 are as under:

Stock Taking was conducted at the end of the year and found that the spare parts units were 18 units valued at $ 480,000. State the stock’s value to be reflected in the financial statement and how to deal with the discrepancies in the records.

Solution

As there are discrepancies in the records as per physical count and as per financial records, 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 accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization’s revenue and costs incurred during the financial period and is indicative of the company’s financial performance by showing whether the company made a profit or incurred losses during that period.read more as the loss stock and the disclosure in the financial statement.

When Should Stock Taking be done?

At the end of the year, as on the balance sheet date before the external auditors.At the time of cost, audit to verify the Stock cost.At the time of stock, audit to verify the reported stock’s accuracy, etc.

Importance

Conducting it is very beneficial for organizations. The importance is described as under –

Through stocktaking, 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 that may be due to bad deliveries or teaming and leading. Also, the staff involved in it can be easily identified with this.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.During cost audit, the price of a stock through stocktaking is determined; hence decline in the value of Stock due to storage or unused Stock can be easily detectable.

Benefits

The benefits of stocktaking 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 in the quantity and the value of the reflected Stock.

Disadvantages

It is a time-consuming and lengthy process.The cost involved in stocktaking is high.Sometimes it becomes difficult to conduct it due to the nature and place of Stock.There can be errors as it is a manual process.