QuickBooks: Inventory Counting

Does your business manage an inventory? In this article, I’ll 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.


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.


One of the questions we ask clients during the discovery phase is, “When was the last time a physical inventory count was done?” Too often, this question garners one of two responses: laughter, because the staff can’t even remember the last time a count was made, or dead silence, because no one knows or is too afraid to admit when it was last done.

Conducting an entire physical inventory count is a laborious, time-consuming, and tedious process. It’s the equivalent of taking the company to the dentist. So why should businesses conduct one? Well, the most obvious reason is the impact on performance indicators and the bottom line. If the inventory on the books is “overstated” – meaning QuickBooks shows more items in inventory than are actually on the shelves – an Inventory Adjustment is necessary to the expense account. This reduces the overall income for the company and, in turn, the amount paid for taxes. Also, the count identifies any significant valuation differences that may have happened since the last count.

Cycle counts offer business owners and managers several benefits, including:

  • Keeping customers happy. Especially for online retailers, taking an order that can’t be filled because an item is out of stock is one of the worst things a business can do to a customer. You can apologize, but the customer will always remember the delay in getting the item. A cycle count lets you know exactly how many products you have on hand.
  • Finding process errors. Is the receiving department lackadaisical about entering item receipts? Are the “pickers” choosing the right locations? Are salespeople choosing the right items on sales documents? These issues, and many others, come to light by examining the variances between what a count reveals versus what’s on the books.
  • Identifying theft. One of the biggest losses companies suffer is not due to customer shoplifting, but to employee theft. Performing regular counts and tying those counts to the books quickly identifies items that are growing legs and walking off.
  • Identifying slow-moving items. While companies tend to focus on the best-selling items, a cycle count will highlight items that are barely moving and are taking up valuable warehouse space. These items probably can be sold off at a discount to make room for more sellable merchandise.

Stress these points to the team members who are going to be doing the counts. Show how their efforts are going to help the company and, in turn, the company’s performance, which benefits everyone. If you just hand people clipboards and tell them to count, they’re probably not going to be motivated to want to do an accurate job. And, it’s likely you’re only going to have one shot at it.


If you’re doing a cycle count, break the inventory items into predefined categories based on the criteria that necessitates repeating time frames for those groups of items. Then, set up a schedule for when and where the team will conduct the counts. For a physical inventory count, start planning about two months in advance. You’ll need this time to plan out the “who, what, when, and where” of the strategy to move through the warehouses and not miss anything. You’ll also need time to alert the people involved and prepare the team for the items they’re about to count.

We strongly recommend you use the QuickBooks Physical Inventory Worksheet (Figure 1). This report uses the exact item names and units of measure expected in the counts. However, you’ll need to customize the report. You should remove the default Quantity on Hand field; people will sometimes assume this number is correct and only make a slight attempt to verify that it’s accurate. The same goes for lot numbers. It’s better to have a “blind count” that forces people to count each item. You may also need to include the U/M field; Bin Location field (if you have Advanced Inventory turned on and Bins are selected in Preferences); and the Classification custom field, if you’re using the ABC classification system (see “The ABC Classification System” quote block).

Figure 1: Physical Inventory Worksheet

Figure 1: Physical Inventory Worksheet

The ABC Classification System


In cycle counting, it’s standard to have a classification scheme of the inventory items (SKUs) that usually categories items into “buckets,” commonly known as “ABC classifications.” For example, items identified as “A” might make up 50% of inventory, “B” items might make up 30%, and “C” items might make up 20%. The A items might be counted every three months, the B items every six months, and the C items only once a year. What places these items in these groups depends on a preselected “driver,” such as turnover, inventory valuation, or importance in production. You can decide this ahead of time, and then assign each item to a custom field in QuickBooks.

Note that this is an arbitrary classification system. You might want to have an “ABCDEF” system, or subs under the ABC classification, such as “AA, AB,” etc. The point is to isolate groups of items that can be narrowly examined and spotted for errors in processing.

You can filter the Physical Inventory Worksheet report based on inventory type and location. You can also further filter it by Classification code if you’re performing a cycle count and only want certain items. Export this report to Excel for further modification, such as changing the order in which the items appear.

Scanning the items can speed up the process. QuickBooks alone cannot make the process easier, as you would have to walk around the warehouse floor with a laptop. There are two third-party inventory counting solutions for capturing the counts in batches electronically:

  • Wasp Barcode Technologies has CountIt Inventory Counting Software with DT10. CountIt lets you download existing inventory information from QuickBooks directly to the DT10 “mobile computer,” take inventory, and then send the updated count back to QuickBooks. CountIT is priced at $995.00.
  • As reviewed in “Barcoding for QuickBooks: SmartScan Inventory Count,” Baus Systems has SmartScan Inventory Count software, which sells for $399.00. The software allows for the reading of bar codes to take the counts, and it then batches the data and uploads it to QuickBooks. It doesn’t come with a scanner, but Baus Systems recommends the Honeywell Dolphin 60s Scanphone.

Note: Both CountIT and SmartScan only track quantities; they don’t update lot and serial numbers at the same time.

If your team has already performed manual counts and you’re using the Advanced Inventory module in QuickBooks Enterprise, you can use a product called Lot Mop to import and instantly update the QuickBooks file from an Excel or comma-separated values (CSV) file. This product can import all of the serial numbers and lot numbers from the list while updating quantities.

As boxes are counted, put colored “dots” (available at any office supply store) on the boxes to give a visual cue that those items have been counted.

Be sure to tally all the individual worksheets and enter the results into the Adjust Quantity/Value on Hand screen before any new transactions are entered.

Organize, plan, and execute the counting activity just as you should any business activity. It will pay off in reduced losses and increased customer satisfaction. Happy counting!

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