A year-end inventory count is a full count of all the stock you own on the last day of your financial year. It gives your accounts their closing stock figure. That figure sets your cost of goods sold, so every error in it moves your profit, and your tax, by the same amount.
This guide covers what to count and what to leave out, the cut-off, valuing the count and the steps in ArmPOS. The worked example is a Kampala wholesaler, in Ugandan shillings.
What a year-end inventory count includes, and what it leaves out
Count everything you own that you will sell, or use up in making what you sell. Leave out what you use to run the business, and goods that belong to someone else.
| Count it | Leave it out |
|---|---|
| Goods for sale, on the shop floor and in the store room | Tools, shelves, scales, vehicles and machines |
| Raw materials and work in progress, if you make goods | Office, cleaning and packing supplies you use up but don't sell |
| Materials that become part of what you make, such as bottles and labels | Goods a customer has paid for and not yet collected |
| Your stock in other branches, and stock moving between them | Goods you hold for a supplier on sale or return |
| Your goods held by others, such as stock on consignment in another shop | Customers' goods left with you for repair |
| Damaged and expired stock, counted apart from good stock |
Tools and machines go on your fixed asset list, never in the stock count. Counting them as stock overstates your inventory, as inventory vs fixed assets explains.
Why the closing count moves your profit and your tax
Cost of goods sold = opening stock + purchases − closing stock. Closing stock is the only figure in it that comes from your count. A count that is too high makes profit too high by the same amount.
For example, a household goods wholesaler in Kampala closes its year on 30 June. The figures are illustrative, in Ugandan shillings.
| Count right | Count 3,000,000 too high | |
|---|---|---|
| Opening stock | 42,000,000 | 42,000,000 |
| Purchases in the year | 186,000,000 | 186,000,000 |
| Closing stock from the count | 48,000,000 | 51,000,000 |
| Cost of goods sold | 180,000,000 | 177,000,000 |
| Sales | 240,000,000 | 240,000,000 |
| Gross profit | 60,000,000 | 63,000,000 |
| Extra tax at 30% | 0 | 900,000 |
A pallet counted twice by two teams can do this. The error then reverses. Next year opens with UGX 3,000,000 of stock that doesn't exist, so next year's profit comes out that much too low.
Uganda taxes companies at 30% of chargeable income (PwC, Uganda corporate tax). A resident company with turnover of UGX 150 million or less is taxed under presumptive tax instead. For tax, closing stock is valued at the lower of cost or market value (PwC, Uganda income determination).
The formula and its inputs are worked through in cost of goods sold.
How to do a year-end inventory count, step by step
Plan the count two weeks ahead, count on the last day of the year, and correct the records the same week. The counting itself follows a normal stock take; these steps add what the accounts need.
1. Fix the date and tell everyone
Count after closing on the last day of the year, or before the first sale the next morning. If you must count on another day, record every delivery and sale in between. Your accountant can then roll the figure to the year end.
2. Set the cut-off
Note the last delivery note and the last sale number before the count. Anything after them belongs to next year, and the table below sorts the goods on the edge.
3. Number the count sheets
Give each area its own numbered sheet, without the recorded quantities, and log which sheets go out and come back. A missing sheet is a missing shelf.
4. Tidy, label and set aside
Group like items, label every shelf, and set aside damaged goods, customers' goods and goods on sale or return before the count starts. Mark each shelf once it is counted, so nothing is counted twice.
5. Count in pairs, in the selling unit
One person counts and one writes, after a short briefing on the sheets and the units. A supervisor recounts a few high-value lines on every sheet.
6. Recount big differences, then adjust
Compare each sheet with the records and recount anything outside your tolerance. Only then correct the records, with a reason for each change, because your accountant may ask.
7. Value the count
Price each line at cost and write down what will sell for less, as the valuation section below shows. Hand the valued list to your accountant with the count sheets.
The cut-off: goods on the edge of the year
An item belongs in the count if you own it at the cut-off, wherever it sits. The goods and their record must fall on the same side. A delivery counted on the shelf needs its purchase entered in the old year.
| Situation at the count | In the count? | What to do with the records |
|---|---|---|
| Delivered and on the shelf, invoice not yet entered | Yes | Enter the purchase, dated on or before the year end |
| Delivered after the cut-off | No | Keep it apart during the count and enter it in the new year |
| Sold and paid for, waiting for the customer to collect | No | Make sure the sale is in the old year, and label the goods |
| Bought and on the road, such as a container from Mombasa | Yes, once you own it under the purchase terms | List it with the bill of lading and the invoice |
| Your goods in another branch, or moving between branches | Yes | Finish or cancel transfers first, so each item is counted once |
| Goods you hold for someone else | No | Label them and leave them off the sheets |
Your purchase terms decide when goods on the road become yours. List each shipment with its documents and let your accountant place it; in-transit inventory covers the rules.
How to value a year-end count
Value each line at cost, then write down anything that will sell for less than it cost. IAS 2 measures stock at the lower of cost and net realisable value: the expected selling price less the costs to complete and sell.
Cost is the purchase price plus the transport, clearing and duty to bring the goods to your shop. For goods bought at different prices, IAS 2 allows FIFO or weighted average cost. FIFO vs LIFO explains why LIFO is not one of them.
For example, the Kampala wholesaler's count turns up two lines worth less than they cost.
| Line | Units | Cost each | Worth each now | Write-down each | Write-down |
|---|---|---|---|---|---|
| Rice cookers, last year's model | 40 | 85,000 | 65,000 | 20,000 | 800,000 |
| Floor cleaner, past its expiry date | 24 | 6,500 | 0 | 6,500 | 156,000 |
| Total | 956,000 |
The rice cookers now sell for UGX 70,000, less UGX 5,000 to deliver, so each is worth UGX 65,000. The expired cleaner will fetch nothing.
Closing stock at cost of UGX 48,000,000 becomes UGX 47,044,000. Under IAS 2, the UGX 956,000 write-down is an expense of this year, not next.
What to do when the count doesn't match the records
Recount first, then trace each difference before you change anything. Less stock than the records usually means a sale, damage or delivery recorded wrongly, or a loss. More stock usually means a delivery or return that was never entered.
Fix the source where you find it, and adjust only what stays unexplained, with a note. Inventory reconciliation walks through tracing each line from the last count to this one.
Use the results to plan next year
The count is the best list you will get all year of what sold and what didn't. Put it to four uses before the sheets go in a drawer.
- Clear what didn't sell. Lines with stock and no sale in 90 days are dead stock: discount, return or bundle them before they lose more value.
- Fix what ran out. Lines that ran short during the year need a higher reorder point. The stockout guide shows how to measure how often it happened.
- Count the problem lines more often. Lines with big differences go onto next year's inventory cycle count rota as A lines.
- Fix the shelves. Differences grouped in one area point to poor labels, mixed products or a cramped layout there.
How to do a year-end count in ArmPOS
ArmPOS prints a count sheet per warehouse, corrects stock with a dated note, and values what you hold at cost for your accountant.
- Finish the year's records. Once the goods are in, edit pending or ordered purchases to received. Approve open transfers, and edit any on Sent to Completed once the goods arrive (Record a purchase, Move stock between warehouses).
- Make the count sheets. In Products › Count Stock, click Count, set the Date to the year end and choose each Warehouse in turn. Add a Category per area if you like. Download each sheet and hide its Quantity column, so each pair counts blind (Count and adjust stock).
- Correct the stock. Make one adjustment per warehouse in Adjustment › Create Adjustment. Enter each difference in Qty with Addition or Subtraction, and a Note such as "Year-end count, 30 June".
- Take out what was lost. Record broken or expired goods with Damages › Create Damage, so they stay apart from count corrections (Record damaged stock).
- Value the stock. Reports › Inventory Valuation multiplies each product's stock on hand by its Cost and gives the total. Print it or save it as a PDF. The Stock Aging and Dead Stock reports show which lines to test for a write-down (Stock reports).
- Bring the ledger in line, if you use Accounting. Its Inventory account goes up with each purchase, but the cost of goods sold, purchase returns and damages are not posted to it. Post a journal entry to bring it to Inventory Valuation's total, which is at cost (Chart of accounts and journal entries). Post the write-down apart, to an allowance account under 1200-INV such as 1210 Inventory allowance, or next month's entry will undo it.
ArmPOS runs the same count for shops in Uganda and South Africa, one warehouse at a time.
Frequently asked questions
When should you do a year-end inventory count?
On the last day of your financial year, after closing, or first thing the next morning before any sale. If you count on another day, record every movement between the count and the year end.
Do I have to close the shop for a year-end count?
Only for the hours of the count. Counting after closing, with the cut-off at the last sale, keeps the shop open for the whole trading day.
Can cycle counts replace the year-end count?
Only if your accountant or auditor accepts the cycle count records as evidence of closing stock. If not, you still count everything on one date.
What is the difference between a year-end count and ending inventory?
The count is the number of units on the shelf. Ending inventory is their value in your accounts, worked out from the count at the lower of cost and net realisable value.
Should damaged stock be in the year-end count?
Yes, counted apart from good stock and valued at what it will fetch, less the cost of selling it. Stock that will fetch nothing is written off.
Set your count date and cut-off now, and give each counting pair its numbered sheets a week ahead. To print count sheets by warehouse and hand your accountant a valuation at cost, create a free ArmPOS account.
