Schedule a Physical Inventory Count: Arrange for a physical count of all inventory items on December 31. This involves counting each item in stock, including raw materials, work-in-progress, and finished goods.
Cease Transactions: Ideally, stop any receiving, shipping, or production activities during the physical count to ensure an accurate representation of the inventory at that particular moment.
Count Inventory: Assign responsible personnel to physically count each item in the inventory. Use barcodes, tags, or other identification methods to ensure accuracy.
Document Any Damages or Obsolescence: While counting, note any damaged or obsolete items. These may need to be adjusted or written off.
Verify Count Accuracy: Cross-check the counts and ensure that there are no discrepancies. If there are discrepancies, investigate and resolve the issues before proceeding.
Calculate the Inventory Value: Multiply the quantity of each item by its unit cost to determine the total value of each item. Then, sum up these values to get the total inventory value.
Consider Additional Costs: If applicable, include additional costs such as shipping, handling, and storage fees in the inventory valuation.
Compare with Accounting Records: Compare the physical count results with the inventory records in your accounting system. Adjust the records if necessary.
Make Necessary Adjustments: If there are differences between the physical count and the recorded amounts, make adjustments to correct the inventory balance.
Review and Finalize: Conduct a final review to ensure all adjustments are accurate. Once verified, finalize the inventory amount for December 31.
Update Financial Statements: Reflect the adjusted inventory amount in your financial statements for the relevant accounting period.
Remember that these steps may vary based on the accounting methods your business uses (e.g., FIFO, LIFO, average cost) and the specific requirements of your industry and jurisdiction. It’s always advisable to consult with an accountant or financial professional to ensure compliance with accounting standards and regulations.