For any business holding stock, the inventory figure is the profit figure’s twin: get closing stock wrong and your profit is wrong by exactly that amount, in the opposite direction.
How stock errors rewrite your results
Overstate closing stock and paper profit inflates (with tax to match); understate it and you look poorer than you are — hurting bank limits and valuations. Two wrong years in a row and no report you produce can be trusted.
The usual sources of error
- No physical verification — books drift from reality via damage, pilferage and unrecorded use
- Valuation confusion: cost formulas applied inconsistently, or stock carried above realisable value against the standards
- Cut-off errors: goods received or dispatched near year-end recorded in the wrong period
- Obsolete stock carried at full value for years
The discipline that fixes it
- Physical counts at least annually — quarterly for fast-moving businesses
- One valuation policy, written down, applied consistently
- A slow-moving stock review with honest write-downs
We build inventory processes inside accounting engagements — clean up your stock picture.
