What is a Physical Count?

A physical count is an actual count of the goods in stock. This is a carefully coordinated counting process in which counting areas are segregated and count teams examine assigned inventory areas, recording their counts on count sheets. If there are any differences between the amounts counted and the amounts recorded in the inventory records, the counts are checked to make sure that they are accurate. If so, the inventory records are updated to match the counted amounts. This update will change the recorded inventory valuation as of the physical count date.

Physical Counts in a Periodic Inventory System

Physical counts are most commonly conducted by businesses that operate a periodic inventory system, where they track the purchases made during a reporting period, add these purchases to the beginning inventory, and then subtract the ending inventory (as derived from a physical count) to arrive at a cost of goods sold for the reporting period. This means that the business has an accurate inventory valuation only on the date when a physical count is conducted.

The Difference Between a Physical Count and Cycle Counting

A cycle count involves an ongoing daily count of a small portion of the total inventory, where entire inventory is counted over an extended period of time. The key differences between a physical count and cycle counting are as follows:

Frequency. A physical count is performed infrequently, while a cycle count may be performed every day.
Coverage. A physical count covers the entire inventory, while each cycle count covers a small part of the inventory.
Operational impact. A physical count may require that the warehouse be shut down for the duration of the count, while a cycle count has minimal impact on ongoing operations.
Impact on accuracy. A physical count may not enhance record accuracy, whereas a cycle count is intended to investigate the reasons for errors.
Resource intensity. A physical count requires many people, whereas a cycle count involves a few people for a short period of time.
Error correction. A physical count may spot errors months after they occurred, while a cycle count is more likely to find them shortly after they occurred.
Cost. A physical count can be expensive, due to the number of people involved, while a cycle count is relatively inexpensive.