QuickBooks Inventory Counting | Improve Operations 2

QuickBooks Inventory Counting

Does your business manage an inventory? In this article, we will explain how you can improve operations, increase customer satisfaction, and reduce theft with one simple action: counting.

How often do you count the money in your wallet or purse? How often do you go through your refrigerator and pantry before you go grocery shopping? How often do you check your bank account to make sure you’re on budget for the month?

As individuals, we regularly check our personal inventory of assets for two reasons: (1) to make sure what we think we have is there, and (2) to make future buying decisions.

Businesses work in pretty much the same way. Product-based companies have to “take stock” periodically of their inventory; otherwise, they risk making bad buying decisions, agitating their customers because they run out of stock, or tying up all their cash in inventory that’s sitting in the warehouse and not generating income. There are a myriad of other reasons, but these are the ones that cause the most immediate harm.

To avoid these issues, management and accounting need to work closely with warehouse crews to conduct inventory “counts.” These are done in one of two ways:

  1. Through a company-wide count, called a “physical inventory count,” which is usually done once a year.
  2. Through a periodic inventory count, called a “cycle count.”

Let’s Get Physical

When and how these counts are performed differ, and the outcome of each serves a different purpose. The physical inventory count can be thought of as a financial accounting activity. Its intent is to record a “snapshot” of the inventory value on a specific day, and that value is then reconciled against the accounting ledger. Little or no attempt is made to understand the reasons for the variances in the levels of inventory recorded. The count is usually done at year-end and is intended to “true up” the numbers in the accounting file.

A cycle count, on the other hand, is intended to identify process problems (a management accounting issue) and to correct on-hand balances. Only a portion of the overall inventory is counted. The emphasis isn’t so much on getting the counts recorded, but on investigating the root causes for variances in what was expected versus what the count shows. At the highest level, cycle counts may identify receiving errors, stocking errors, or production and reporting errors.

I like to apply the “Five Ws and one H” journalism rule – asking who, what, where, when, why, and how – when planning inventory counts.


Note: The Five Ws, Five Ws and one H, or the Six Ws are questions whose answers are considered basic in information-gathering. They are often mentioned in journalism (cf. news style), research, and police investigations.[1] They constitute a formula for getting the complete story on a subject.[2] According to the principle of the Five Ws, a report can only be considered complete if it answers these questions starting with an interrogative word:[3]

Who is it about?
What happened?
When did it take place?
Where did it take place?
Why did it happen?
Some authors add a sixth question, “how”, to the list, though “how” can also be covered by “what”, “where”, or “when”:[3]

How did it happen?
Each question should have a factual answer — facts necessary to include for a report to be considered complete.[4] Importantly, none of these questions can be answered with a simple “yes” or “no”.


When deciding to take a physical inventory count or a cycle count, you have to consider who will be involved in the count and who posts the completed count. While it may seem natural to ask the people who are in the warehouse every day to do the counting, you might get a more “objective” count if it’s done by people who are familiar with the products, but who don’t necessarily walk the floors of the warehouse every day. Ask customer service, sales, and even (gasp) accounting folks to assist in the counts.


Some businesses even pay an outside, third-party company to come in and perform the inventory count. These companies have methodologies set up to perform the counts quickly, even though they may not be familiar with your particular line of goods.


When you send your own people out to do the counts, send them out in pairs. One person can do the actual counting while another person writes the numbers down. If your team also will be counting lot or serial numbers, you might want to have someone else go ahead of the pairs to turn the boxes so the serial numbers can be read easily.




What are you counting? If you’re taking a physical inventory count, by definition, you’ll be counting the entire inventory. With a cycle count, you’ll be counting only segments of inventory. But either way, does that mean you need to count every screw and bolt? No. For inventory part and assembly-type items, you need a correct count for the stocking reports and the balance of the Inventory Asset account on the balance sheet. Non-inventory parts are usually counted in the “purchasing” unit (by box or case) and not in each “base” or “stocking” unit of measure. It’s more important to get a “value” of these items on hand than a specific count. You would usually count these items once a year, rather than track quantity on a daily basis like you would frequently used inventory parts.


Also, consider what measurement of the items the people are to count. Are the counters counting pallets, boxes, cases, or individual items? The folks doing the counting should be provided with a preprinted list of items that includes the desired unit of measure they are to count. This is usually the base unit of measure in QuickBooks and can be included in the inventory count sheet.


The Physical Inventory Worksheet is a printable list of items and their attributes, as shown in the QuickBooks item list and Figure 1. You can access this report under the Inventory drop-down in QuickBooks Premier and Enterprise. This is the primary tool for participants to use for tracking the results of their counts. Custom fields, like an “ABC classification,” can be added for specific item attributes. (More on the QuickBooks inventory worksheet is explained in the “How?” section of this article.)


Our company, Business Solution Providers, once had a rather large T-shirt manufacturer as an inventory client. The client’s management team decided they knew how to conduct the yearly counts and didn’t need to consult us. Consequently, 19- and 20-year-old employees were left to roam the retail store and warehouses with blank inventory sheets. What one young person called an item, another person had another name for, and the person who entered the information in QuickBooks called it something else. Needless to say, at great expense, the company had to entirely redo the count.



This might seem like a simple question, but areas often are “forgotten.” Or, what one person thinks is an inventory location isn’t necessarily what another person thinks it is. Remember, ALL areas where an item that’s being counted is located must be included in order to have an accurate count. Do you have an area where returned items from customers are kept? Do you have a quality control area where items might be kept out of stock? Do your salespeople take items with them for demonstrations or to give away as samples?


Some companies may take ownership of goods from overseas suppliers once the items leave the factory or hit customs in the United States but are not yet delivered. In this case, are the items “on the books” and, therefore, showing up as “quantity on hand” but not yet in the warehouse? Decide ahead of time whether such a shipment is to be included in the final numbers. Similarly, make sure you don’t count inventory that has already been sold on invoices or sales receipts, but hasn’t yet left the shipping department. This inventory has already been deducted from QuickBooks.




Although physical inventory counts are traditionally done at the end the fiscal year, they can realistically be done anytime. For example, we encourage companies to conduct a count when creating a new QuickBooks file in order to start with correct balances. Cycle counts are done based on a predetermined schedule and the aforementioned criteria.


There’s one critical point, however, about when to do any inventory count: Make sure that ALL ACTIVITY IS STOPPED for the items you’re counting while you’re conducting the count. This means:


  • You should not receive into inventory any of the parts being counted,
  • You should not sell any items being counted, and
  • You should not make any inventory transfers or adjustments while taking the counts.

Also, the new counts need to be posted in QuickBooks, preferably at the end of the day and before any transactions are entered. This can’t be stressed enough. If you create ANY transactions that impact the quantity balances of any of the items on the count, then you have, in effect, called for a new count.


Operationally, meeting this requirement might be difficult, which is why we usually recommend:


  • Conducting the count on a weekend or non-production/fulfillment time if staff members are to conduct the count.
  • Conducting the count at the end of the month or quarter, which allows for analysis on the financial accounting side to take place.
  • Consider some form of cycle counting, so all production or fulfillment is not shut down for an extended period of time.


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2 thoughts on “QuickBooks Inventory Counting | Improve Operations

  • Amy

    I am trying to find a way to create items in QB using different innovatory parts. Example: I am setting up gift-wrapping. I have 10 gift bags, 20 bows and ribbon. The item I want the invoice to show is “Gift Wrapping”, not 1 bow, 1 bag and ribbons all as individual items. I also want my innovatory of bags and bows to go down when I invoice someone for “Gift Wrapping”

    I do not feel like this should be too complicated but no one seems to know how to do it….


    • Jay Thompson
      Jay Thompson

      Hi Amy –
      You should use an “item group” which can include all of the items you described above but show the customer, “Gift Wrapping” as the description. When you create the group, make sure you un-check the, “Print items in group” box. Otherwise, you will not be accomplishing much!