Plan the count before the day
Choose the count date, ideally the last day of the year or as close as practical, and arrange to stop or record sales and receipts during the count. Assign areas to people, print count sheets listing item names, locations and units of measure, and prepare labels or tags if needed. Tell staff what to do with damaged or obsolete items.
Receive and record everything delivered before the cutoff, and hold shipments that arrive after. Goods in transit require a note on who owns them at the date.
Count with checks
Use two people where possible, one counting and one recording, and have a second person recount a sample of high-value items. Count by location so nothing is missed or counted twice. Mark counted areas. Include items held at other locations, with employees or on consignment, and exclude items belonging to customers or consignors.
Note anything damaged, expired or slow moving. It may be worth less than cost.
Compare to the books
Total the count at cost and compare it to the inventory balance in your accounting software or inventory system. Investigate large differences by item. Typical causes are unrecorded sales or returns, receipts posted to the wrong date, theft, and wrong unit conversions.
Record the adjustment between book and counted inventory in a separate shrinkage or adjustment account, so you can track trends over time instead of burying them in cost of goods sold.
Valuation support
Keep supplier invoices that support the cost of the items on hand. If prices changed during the year, your preparer will tell you how to value what is left, using methods like first in first out or average cost, and the choice must be applied consistently. A change in method needs advice.
Items worth less than cost for reasons such as damage should be documented with photos and notes before any write-down.
File the evidence
Save the signed count sheets, the summary, the reconciliation to the books and the adjustment entry in your year-end folder. If a lender or buyer ever asks about inventory, this package answers the question.
Between counts, consider cycle counts of a few items each month. They catch errors earlier and reduce the work at year end.
Mistakes to avoid on count day
The classic errors are counting some items twice because they moved during the count, leaving out stock in a back room or vehicle, mixing units such as cases and single pieces, and counting items sold but not yet shipped. A simple rule helps: no stock moves during the count unless it is logged on a movement sheet.
After the count, resist the urge to adjust the numbers to match what the books say. Investigate the difference and record the true count. A count that merely confirms the books proves nothing.
Common questions
Do service businesses need to count inventory?
Usually not, unless they hold supplies or goods for resale. Ask your preparer if you are unsure.
Can I estimate inventory instead of counting?
Estimates may be used in some settings, but a physical count is the most reliable support. Ask your preparer what they require.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.