Physical counts of inventory, also known as taking an inventory, are necessary in both the periodic and perpetual inventory systems. In the periodic system, a physical count is necessary to determine the cost of inventory and goods sold. In the perpetual system, a physical count is used to adjust the inventory account balance to the actual inventory on hand, as events such as theft, loss, damage, and errors can cause discrepancies between the inventory account balance and the actual inventory on hand.
To determine the dollar amount for a physical count of inventory, the units of each product on hand are counted and multiplied by their cost per unit, and then the costs for all products are added together. It is important to ensure that all merchandise owned by the business on the inventory date is included in the inventory and that only such merchandise is included. This includes merchandise in transit, which may be owned by the business but not yet received. The legal title to merchandise in transit on the inventory date depends on the shipping terms, which can be either FOB shipping point or FOB destination. Goods in transit purchased on FOB shipping point terms are included in the buyer's inventory and excluded from the seller's inventory, while goods in transit purchased on FOB destination terms are included in the seller's inventory and excluded from the buyer's inventory.
Goods on consignment, which are owned by one party but held by another party (the consignee) to be sold on commission, are included in the consignor's inventory and excluded from the consignee's inventory. It is important to accurately track and account for all merchandise, including those in transit and on consignment, to ensure the accuracy of the inventory and financial statements.