How to do a stocktake for your limited company

Why a stocktake matters

Stock is usually one of the largest assets on a trading company's balance sheet, and it feeds directly into the profit and loss account. Your closing stock value reduces the cost of goods sold, and an error in either direction distorts the profit figure reported for the period. Overstate closing stock and you inflate profit; understate it and you deflate it. Both create problems — with HMRC, with lenders assessing your accounts, and with any co-shareholders reviewing your figures.

Beyond the accounts, a regular stocktake exposes shrinkage — the difference between the stock your records say you hold and the stock you can physically count. Shrinkage captures theft, damage, mislabelling and supplier short-delivery, none of which shows up in your accounting system automatically. The stocktake is the check that keeps the system honest.

Plan the count before you start

A disorganised stocktake produces unreliable figures. Invest the planning time and the count itself becomes straightforward:

1. Agree the count date. For statutory accounts, this is your year-end. For management purposes, monthly or quarterly works well for fast-moving stock. Ideally count at a point of low activity — before the next delivery lands, after a busy dispatch day.
2. Freeze stock movements. Stop goods in and out as close to the count time as possible so you're counting a settled position. Late deliveries arriving mid-count create reconciliation nightmares.
3. Create a count sheet. List every SKU or product category with a space to enter the physical count. Your accounting or stock-management system should generate this.
4. Assign counters and a counter-checker. Two people count the same section independently. Discrepancies are recounted rather than averaged.
5. Count location by location. Warehouse bays, shelves, storage areas — work through them systematically with each area signed off before moving on.

Valuing your stock correctly

UK accounting standards (FRS 102 for most small companies) require stock to be valued at the lower of cost and net realisable value (NRV). This is important and worth understanding:

• Cost — what you paid to acquire or produce the item, including delivery costs and directly attributable production costs if manufactured. Not the selling price.
• Net realisable value (NRV) — the estimated selling price less any costs still to be incurred to make the sale.

The lower-of-cost-or-NRV rule means that if any stock has fallen in value — because it's damaged, obsolete, superseded or slow-moving — you write it down to what you can realistically sell it for, not what you paid. This is a prudence principle. Carrying stock at original cost when you know you can only sell it for less overstates your assets. Your accountant will advise on the write-down process; this page is for guidance only.

Reconcile and record the result

Once the physical count is complete:

1. Compare physical counts to book stock — the quantities your accounting system expected. The differences are your shrinkage or surplus.
2. Investigate significant variances before accepting them. A large discrepancy in a single line is often a miscounted location or a goods-received note that wasn't processed, not actual loss.
3. Write off confirmed losses — items genuinely missing, damaged or obsolete are taken off the balance sheet as a cost.
4. Update your stock records to the counted and agreed position.
5. Record the closing stock value in your accounts — this becomes the opening stock figure for the next period.

For your year-end accounts, send your accountant the final counted stock list and the values applied. Keep the original count sheets — they are your audit trail if HMRC ever challenges the figure.

Use the stocktake to manage the business

Beyond the accounting obligation, treat the stocktake as a management tool. Patterns in the shrinkage or surplus figures tell you things your invoicing system cannot:

• Persistent losses in one location may point to a process failure or a security issue.
• Consistently surplus stock in certain lines may indicate ordering is too aggressive relative to demand.
• Write-down volumes tell you how effectively you are managing obsolescence.

If your stock profile is fast-moving, a formal stocktake once a year is the minimum — but cycle counting (counting a different portion of stock each week or month on a rolling basis) keeps your records more accurate in real time and makes the year-end count smaller and faster. For a business where inventory is central to operations, accurate stock records also improve the quality of your management accounts and the reliability of any cash-flow forecasts you produce.