Business Definition for: physical inventory
physical inventory
determining the quantity of inventory on hand through an inventory count (i.e., quantity, weight). By multiplying the quantity times the unit cost, the total inventory cost is derived. There are three types of physical inventories. One is a continuous inventory to supplement the perpetual inventory records. Another is an inventory count of only specific merchandise on a periodic basis. The third is an annual year-end count. The physical inventory is compared to the book inventory. Discrepancies are noted and investigated. The financial statements must show inventory at the perpetual amount. Assume book inventory is $10,000 and physical inventory is $9900. The entry for the inventory difference is to debit inventory shortage and credit inventory for $100.
physical inventory
physical inventory
actual count of items in inventory, as contrasted with accepting the values shown on accounting records.
Related Terms:
observation, listing, counting, and measuring of the assets of a company, such as inventory, fixed assets, cash on hand, stocks, or bonds. It also includes other items such as insurance policies and contracts. The auditor typically substantiates the figure as per the financial records by physically determining the existence of the item and examining it. For example, the fixed asset account can be physically verified by inspecting the individual machines, buildings, or other fixed assets. The methods used for verification will depend on the scope of work required and type of asset being verified. With some types of items, the auditor will require the assistance of other professionals familiar with the item-for example, with precious metals, minerals, construction projects, and some manufacturing activities. Standards of auditing require some form of physical verification when inventory is present in the financial statements of a company. The timing of the verification depends upon such factors as method of accounting used for the item, auditor's satisfaction with internal controls associated with the item, size of the item in dollars and physical bulk (gold vs. widgets), and other matters relating to the audit.
Referring Terms:
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