Physical Inventory Count Guide

Overview

Physical Inventory Counts reconcile actual on-hand stock with system records by counting physical inventory and adjusting for discrepancies. This process is essential for maintaining inventory accuracy, identifying shrinkage, detecting errors, and ensuring financial reporting integrity.

The system automatically calculates variances, creates adjustment movements, and maintains an immutable audit trail for regulatory compliance.

Core Concepts
When to Perform Counts
Count Procedures
Recording Physical Counts
Variance Handling
Count Validation
Best Practices
Business Rules
API Endpoints

Core Concepts

What is a Physical Count?

A physical count compares actual counted quantity with system quantity and adjusts inventory to match reality:

System Record (Before Count):
Product: Laptop - Dell XPS 13
Warehouse: Main DC
Quantity on Hand: 100 units
Reserved: 10 units
Available: 90 units

Physical Count:
Counted Quantity: 98 units

System Record (After Count):
Quantity on Hand: 98 units
Reserved: 10 units
Available: 88 units
Variance: -2 units (shrinkage)

Why Perform Physical Counts?

Regulatory Compliance:

Required by GAAP, IFRS for financial reporting
SOX compliance for inventory valuation
Tax audit requirements

Operational Accuracy:

Detect theft, damage, or loss (shrinkage)
Identify data entry errors
Prevent stockouts from inaccurate records
Improve order fulfillment accuracy

Financial Integrity:

Accurate cost of goods sold (COGS)
Correct inventory asset valuation
Reliable financial statements

Process Improvement:

Identify systemic issues
Improve warehouse procedures
Reduce inventory variance over time

Physical Count Model

The system records:

json

{
  "product_id": 42,
  "warehouse_id": 1,
  "counted_quantity": 98,
  "system_quantity_before": 100,
  "variance": -2,
  "variance_percentage": -2.0,
  "counted_by": 5,
  "counted_at": "2025-01-16T10:00:00.000000Z",
  "adjustment_movement_id": 892
}

Key Fields:

counted_quantity: Actual counted units
system_quantity_before: System quantity before adjustment
variance: Difference (counted - system)
variance_percentage: Variance as percentage of system quantity
adjustment_movement_id: Stock movement created to correct variance

Count Types

Full Physical Count (Annual):

Count all products in all warehouses
Usually performed at year-end
Most time-consuming but most accurate

Cycle Count (Ongoing):

Count subset of products on rotating schedule
Example: 20% of products weekly
Spreads workload throughout year
Maintains continuous accuracy

Spot Count (Ad-hoc):

Count specific products as needed
Triggered by suspected discrepancy
Quick response to issues

ABC Count (Priority-based):

A items (high value): Count monthly
B items (medium value): Count quarterly
C items (low value): Count annually
Focuses effort on high-impact products

When to Perform Counts

Recommended Schedule

Annual Full Count:

End of fiscal year
Before financial statement preparation
All products, all warehouses
Complete reconciliation

Quarterly Cycle Counts:

25% of products each quarter
Focus on high-value items
Maintain ongoing accuracy
Detect issues early

Monthly Spot Counts:

Products with recent discrepancies
High-theft items
Fast-moving products
Critical stock items

Event-Triggered Counts:

After major shipment received
Before warehouse reorganization
When variance suspected
After inventory system migration

ABC Analysis Schedule

Categorize products by annual dollar volume:

A Items (70-80% of value, 10-20% of SKUs):

Count: Monthly
Examples: High-value electronics, jewelry
Priority: Critical

B Items (15-25% of value, 30-40% of SKUs):

Count: Quarterly
Examples: Mid-range products
Priority: Important

C Items (5-10% of value, 40-50% of SKUs):

Count: Annually
Examples: Low-cost consumables
Priority: Standard

Count Procedures

Step-by-Step Process

1. Preparation Phase

Plan the Count:

Schedule during low-activity period
Assign count teams
Prepare count sheets or mobile devices
Freeze transactions (optional)

Organize Warehouse:

Clean and organize storage areas
Group similar products
Label bin locations clearly
Separate damaged/quarantined items

2. Counting Phase

Count Instructions:

Count each product in designated area
Don't reference system quantities (blind count)
Use two-person teams for accuracy
Record bin locations
Note damaged or obsolete items

Count Sheet Example:

Product: Laptop - Dell XPS 13
SKU: DELL-XPS13-001
Warehouse: Main DC
Location: A-12-3

Counter 1: 98 units
Counter 2: 98 units
Match: ✅ Yes

Notes: All units in good condition

3. Recording Phase

Enter Counts into System:

Record counted quantities via API
System calculates variances automatically
Review large variances before accepting
Create adjustment movements

4. Investigation Phase

Investigate Variances:

Recount if variance > threshold (e.g., 5% or $500 value)
Check recent transactions
Review movement history
Interview staff if significant discrepancy

5. Adjustment Phase

Accept Count:

System adjusts inventory to match count
Creates stock movement record
Updates last_counted_at timestamp
Generates variance report

Document Findings:

Record reasons for variances
Note process improvements needed
Update procedures if systemic issues found

Recording Physical Counts

Record Physical Count

Submit counted quantity to reconcile inventory:

Endpoint: POST /api/v1/operations/inventory/physical-count

Request:

bash

curl -X POST "https://api.crm.test/api/v1/operations/inventory/physical-count" \
  -H "Authorization: Bearer {token}" \
  -H "Content-Type: application/json" \
  -d '{
    "product_id": 42,
    "warehouse_id": 1,
    "counted_quantity": 98
  }'

Request Parameters:

Parameter	Type	Required	Description
`product_id`	integer	✅ Yes	Product being counted
`warehouse_id`	integer	No	Warehouse location (null = default)
`counted_quantity`	integer	✅ Yes	Actual counted units (≥ 0)

Response (200 OK):

json

{
  "message": "Physical count recorded successfully",
  "data": {
    "id": 123,
    "product_id": 42,
    "warehouse_id": 1,
    "quantity_on_hand": 98,
    "quantity_reserved": 10,
    "quantity_available": 88,
    "reorder_point": 20,
    "reorder_quantity": 50,
    "last_counted_at": "2025-01-16T10:00:00.000000Z",
    "last_movement_at": "2025-01-16T10:00:00.000000Z",
    "warehouse": {
      "id": 1,
      "name": "Main Distribution Center",
      "code": "MDC",
      "type": "distribution"
    },
    "product": {
      "id": 42,
      "name": "Laptop - Dell XPS 13",
      "sku": "DELL-XPS13-001",
      "type": "standard"
    },
    "created_at": "2024-12-01T00:00:00.000000Z",
    "updated_at": "2025-01-16T10:00:00.000000Z"
  }
}

What Happens:

System retrieves current inventory:
- Current quantity_on_hand: 100 units
Calculates variance:
- Variance: 98 (counted) - 100 (system) = -2 units
Creates adjustment movement (if variance ≠ 0):
- Movement type: physical_count
- Quantity: -2
- Reason: "physical_count"
Updates inventory:
- quantity_on_hand: 100 → 98
- last_counted_at: Updated to current timestamp
Dispatches domain event:
- InventoryCountCompleted event fired
- Contains variance details for reporting

No Variance Example

If counted quantity matches system:

Request:

json

{
  "product_id": 42,
  "warehouse_id": 1,
  "counted_quantity": 100
}

System Behavior:

Variance: 0 units
No adjustment movement created (no change needed)
last_counted_at: Updated to current timestamp
inventory record: Not modified (already correct)

Response:

json

{
  "message": "Physical count recorded successfully",
  "data": {
    "quantity_on_hand": 100,
    "last_counted_at": "2025-01-16T10:00:00.000000Z"
  }
}

Multiple Products Count

Record counts for multiple products:

bash

# Product 1
curl -X POST "https://api.crm.test/api/v1/operations/inventory/physical-count" \
  -H "Authorization: Bearer {token}" \
  -H "Content-Type: application/json" \
  -d '{
    "product_id": 42,
    "warehouse_id": 1,
    "counted_quantity": 98
  }'

# Product 2
curl -X POST "https://api.crm.test/api/v1/operations/inventory/physical-count" \
  -H "Authorization: Bearer {token}" \
  -H "Content-Type: application/json" \
  -d '{
    "product_id": 43,
    "warehouse_id": 1,
    "counted_quantity": 145
  }'

# Product 3
curl -X POST "https://api.crm.test/api/v1/operations/inventory/physical-count" \
  -H "Authorization: Bearer {token}" \
  -H "Content-Type: application/json" \
  -d '{
    "product_id": 44,
    "warehouse_id": 1,
    "counted_quantity": 0
  }'

Variance Handling

Understanding Variances

Variance Formula:

Variance = Counted Quantity - System Quantity
Variance % = (Variance / System Quantity) × 100

Examples:

Negative Variance (Shrinkage):

System: 100 units
Counted: 98 units
Variance: -2 units (-2%)
Reason: Theft, damage, data entry error

Positive Variance (Overage):

System: 100 units
Counted: 103 units
Variance: +3 units (+3%)
Reason: Data entry error, unreported receipt

No Variance (Accurate):

System: 100 units
Counted: 100 units
Variance: 0 units (0%)
Reason: System is accurate

Variance Thresholds

Implement variance investigation rules:

Recount Threshold:

Variance > 5% or $500 value
Requires second count before accepting

Approval Threshold:

Variance > 10% or $2,000 value
Requires manager approval

Investigation Threshold:

Variance > 20% or $5,000 value
Requires formal investigation

Example:

Product: Laptop - Dell XPS 13
Cost: $1,200 per unit

Variance: -5 units
Value: $6,000 loss
Action: ✅ Trigger investigation (> $5,000)

Variance: -2 units
Value: $2,400 loss
Action: ✅ Require approval (> $2,000)

Variance: -1 unit
Value: $1,200 loss
Action: ✅ Recount (> $500)

Common Variance Causes

Negative Variances (Shrinkage):

Theft: Internal or external
Damage: Unreported damage/disposal
Data Entry: Incorrect receipts recorded
Location: Product in wrong location (not counted)
Shipping: Shipped but not recorded

Positive Variances (Overage):

Data Entry: Incorrect shipment recording
Returns: Unreported returns
Location: Product counted in multiple locations
Receipts: Received but not recorded

Viewing Variance Reports

Get product movement history:

bash

curl -X GET "https://api.crm.test/api/v1/operations/stock-movements/product/42/history" \
  -H "Authorization: Bearer {token}"

Filter for physical count movements:

bash

curl -X GET "https://api.crm.test/api/v1/operations/stock-movements?movement_type=physical_count" \
  -H "Authorization: Bearer {token}"

Get movement details:

bash

curl -X GET "https://api.crm.test/api/v1/operations/stock-movements/892" \
  -H "Authorization: Bearer {token}"

Response (Physical Count Movement):

json

{
  "data": {
    "id": 892,
    "product_id": 42,
    "warehouse_id": 1,
    "movement_type": {
      "value": "physical_count",
      "label": "Physical Count"
    },
    "is_inbound": false,
    "is_outbound": true,
    "quantity": -2,
    "quantity_before": 100,
    "quantity_after": 98,
    "product": {
      "id": 42,
      "name": "Laptop - Dell XPS 13",
      "sku": "DELL-XPS13-001"
    },
    "warehouse": {
      "id": 1,
      "name": "Main Distribution Center",
      "code": "MDC"
    },
    "reason": "physical_count",
    "notes": null,
    "created_by": 5,
    "creator": {
      "id": 5,
      "name": "Inventory Manager",
      "email": "inventory@example.com"
    },
    "created_at": "2025-01-16T10:00:00.000000Z"
  }
}

Count Validation

Validation Rules

1. Product Validation

json

{
  "product_id": 99999
}
// ❌ Error: Selected product does not exist

Product must exist in the system.

2. Warehouse Validation

json

{
  "warehouse_id": 99999
}
// ❌ Error: Selected warehouse does not exist

Warehouse must exist (if specified).

3. Counted Quantity Validation

json

{
  "counted_quantity": -5
}
// ❌ Error: Counted quantity cannot be negative

{
  "counted_quantity": "abc"
}
// ❌ Error: Counted quantity must be a whole number

Counted quantity must be non-negative integer (≥ 0).

4. Reserved Quantity Validation

json

{
  "product_id": 42,
  "warehouse_id": 1,
  "counted_quantity": 5
}
// Current reserved quantity: 10 units
// ❌ Error: Counted quantity cannot be less than reserved quantity.
// Reserved: 10, Counted: 5

Why?

Reserved stock represents commitments (pending orders). You cannot count fewer units than are already committed.

Example:

System Record:
- Quantity on Hand: 100 units
- Reserved: 10 units (for pending orders)
- Available: 90 units

Physical Count: 8 units ❌ Invalid
Reason: Cannot have 8 total units when 10 are already reserved

Physical Count: 12 units ✅ Valid
Result: 12 on hand, 10 reserved, 2 available

Solution:

Release Reservations First:

bash

# Cancel orders or release reservations
POST /inventory/release
{
  "product_id": 42,
  "warehouse_id": 1,
  "quantity": 5
}

# Then record count
POST /inventory/physical-count
{
  "product_id": 42,
  "warehouse_id": 1,
  "counted_quantity": 5
}

Count Higher Quantity:

Recount to ensure accuracy
Verify reserved quantities in system
Adjust count if needed

Error Responses

Validation Error (422 Unprocessable Entity):

json

{
  "message": "The given data was invalid.",
  "errors": {
    "product_id": [
      "Selected product does not exist"
    ],
    "counted_quantity": [
      "Counted quantity cannot be negative"
    ]
  }
}

Reserved Quantity Error (500 Internal Server Error):

json

{
  "message": "Counted quantity cannot be less than reserved quantity. Reserved: 10, Counted: 5"
}

Best Practices

Don't show system quantities to counters:

Good:

Count Sheet:
Product: Laptop - Dell XPS 13
SKU: DELL-XPS13-001
Location: A-12-3

Counted Quantity: ______ (blank)

Bad:

Count Sheet:
Product: Laptop - Dell XPS 13
System Quantity: 100 units ❌ Don't show

Counted Quantity: ______ (biased toward 100)

2. Two-Person Teams

Use two-person teams for accuracy:

Counter 1 counts: 98 units
Counter 2 counts: 98 units
Match: ✅ Accept count

Counter 1 counts: 98 units
Counter 2 counts: 102 units
Mismatch: ❌ Recount

3. Schedule Strategically

Best Times:

After business hours
Weekends
Slow periods
Between receiving shipments

Avoid:

Peak season
During active receiving
Major sale events
Warehouse reorganization

4. Investigate Large Variances

Always investigate before accepting:

Variance: -20 units ($24,000 value)
Actions:
1. Recount immediately
2. Check recent transactions
3. Search warehouse thoroughly
4. Interview staff
5. Review security footage
6. Document findings

5. Document Everything

Record detailed notes:

json

{
  "product_id": 42,
  "counted_quantity": 98,
  "notes": "Counted by John Doe and Jane Smith. 2 units found damaged in receiving area, removed from inventory. Variance appears to be unreported damage."
}

6. Regular Cycle Counts

Maintain ongoing accuracy:

Weekly Cycle:

Week 1: Products 1-100
Week 2: Products 101-200
Week 3: Products 201-300
Week 4: Products 301-400
Week 5: Products 401-500

Repeat cycle

7. Root Cause Analysis

Track variance trends:

Product: Laptop - Dell XPS 13

January Count: -2 units (shrinkage)
February Count: -3 units (shrinkage)
March Count: -4 units (shrinkage)

Pattern: Consistent negative variance
Action: Investigate for theft or process issue

8. Freeze Transactions (Optional)

For critical counts, pause transactions:

1. Announce count period
2. Stop receiving/shipping
3. Complete count
4. Record counts
5. Resume operations

Not always practical, but ensures accuracy.

9. Compare Before and After

Review last count date:

json

{
  "last_counted_at": "2024-12-15T10:00:00.000000Z",
  "days_since_last_count": 32,
  "variance_trend": "improving"
}

10. Train Staff

Ensure counters understand:

Proper counting techniques
How to handle damaged goods
Importance of accuracy
Variance investigation process

Business Rules

Rule 1: System Adjustment

System always adjusts to match counted quantity:

System Before: 100 units
Counted: 98 units
System After: 98 units ✅ Always

System is the "source of truth" after count.

Rule 2: Immutable Movement Record

Physical count creates a permanent audit record that cannot be modified or deleted. The system enforces immutability to maintain regulatory compliance.

Restrictions:

Cannot update count movement records
Cannot delete count movement records
All count records are permanent

Solution - Create New Count:

If you need to correct a count, perform a new physical count:

bash

POST /inventory/physical-count

json

{
  "product_id": 42,
  "warehouse_id": 1,
  "counted_quantity": 97
}

Rule 3: Reserved Quantity Constraint

Cannot count less than reserved:

Reserved: 10 units
Minimum Counted: 10 units ✅
Less than 10: ❌ Invalid

Rule 4: Last Counted Timestamp

Every count updates last_counted_at:

Before Count: last_counted_at = "2024-12-15"
After Count: last_counted_at = "2025-01-16" ✅

Even if variance = 0, timestamp updates.

Rule 5: Event Dispatching

Every count triggers a system event that contains count details:

Event Data:

json

{
  "event": "InventoryCountCompleted",
  "inventory_id": 123,
  "product_id": 42,
  "warehouse_id": 1,
  "system_quantity": 100,
  "counted_quantity": 98,
  "variance": -2,
  "user_id": 5
}

Event Uses:

Send notifications for large variances
Update analytics dashboards
Trigger investigations
Log to external systems

API Endpoints

Physical Count Operations

Method	Endpoint	Description
POST	`/inventory/physical-count`	Record physical count and adjust inventory

Method	Endpoint	Description
GET	`/inventory/show?product_id={id}`	View current inventory levels
GET	`/stock-movements`	View count movements (filter by `movement_type=physical_count`)
GET	`/stock-movements/product/{productId}/history`	Product movement history

Base URL: https://api.crm.test/api/v1/operations/

Inventory Management - Multi-warehouse inventory tracking
Stock Movement Tracking - Audit trail and movement history
Warehouse Transfers - Inter-warehouse transfers
Product Management - Product catalog
Warehouse Management - Warehouse configuration

Next Steps

Plan Counts - Develop a counting schedule (annual, cycle, spot)
Prepare Procedures - Document counting standards
Train Staff - Ensure counters understand process
Record Counts - Submit counted quantities via API
Investigate Variances - Review and document discrepancies
Improve Processes - Address root causes of variances
Monitor Trends - Track accuracy improvements over time

Physical Inventory Count Guide ​

Overview ​

Table of Contents ​

Core Concepts ​

What is a Physical Count? ​

Why Perform Physical Counts? ​

Physical Count Model ​

Count Types ​

When to Perform Counts ​

Recommended Schedule ​

ABC Analysis Schedule ​

Count Procedures ​

Step-by-Step Process ​

1. Preparation Phase ​

2. Counting Phase ​

3. Recording Phase ​

4. Investigation Phase ​

5. Adjustment Phase ​

Recording Physical Counts ​

Record Physical Count ​

No Variance Example ​

Multiple Products Count ​

Variance Handling ​

Understanding Variances ​

Variance Thresholds ​

Common Variance Causes ​

Viewing Variance Reports ​

Count Validation ​

Validation Rules ​

1. Product Validation ​

2. Warehouse Validation ​

3. Counted Quantity Validation ​

4. Reserved Quantity Validation ​

Error Responses ​

Best Practices ​

1. Blind Counting ​

2. Two-Person Teams ​

3. Schedule Strategically ​

4. Investigate Large Variances ​

5. Document Everything ​

6. Regular Cycle Counts ​

7. Root Cause Analysis ​

8. Freeze Transactions (Optional) ​

9. Compare Before and After ​

10. Train Staff ​

Business Rules ​

Rule 1: System Adjustment ​

Rule 2: Immutable Movement Record ​

Rule 3: Reserved Quantity Constraint ​

Rule 4: Last Counted Timestamp ​

Rule 5: Event Dispatching ​

API Endpoints ​

Physical Count Operations ​

Related Endpoints ​

Related Guides ​

Next Steps ​

Physical Inventory Count Guide

Overview

Table of Contents

Core Concepts

What is a Physical Count?

Why Perform Physical Counts?

Physical Count Model

Count Types

When to Perform Counts

Recommended Schedule

ABC Analysis Schedule

Count Procedures

Step-by-Step Process

1. Preparation Phase

2. Counting Phase

3. Recording Phase

4. Investigation Phase

5. Adjustment Phase

Recording Physical Counts

Record Physical Count

No Variance Example

Multiple Products Count

Variance Handling

Understanding Variances

Variance Thresholds

Common Variance Causes

Viewing Variance Reports

Count Validation

Validation Rules

1. Product Validation

2. Warehouse Validation

3. Counted Quantity Validation

4. Reserved Quantity Validation

Error Responses

Best Practices

1. Blind Counting

2. Two-Person Teams

3. Schedule Strategically

4. Investigate Large Variances

5. Document Everything

6. Regular Cycle Counts

7. Root Cause Analysis

8. Freeze Transactions (Optional)

9. Compare Before and After

10. Train Staff

Business Rules

Rule 1: System Adjustment

Rule 2: Immutable Movement Record

Rule 3: Reserved Quantity Constraint

Rule 4: Last Counted Timestamp

Rule 5: Event Dispatching

API Endpoints

Physical Count Operations

Related Endpoints

Related Guides

Next Steps