What is Physical Inventory?
Physical inventory is the process of counting the material stock physically in the warehouse with the stock present in the SAP system.
The process of counting physical inventory, posting corresponding document and posting the difference is called Physical Inventory.
It is mandatory for legal reasons; every company must carry out a physical inventory of its warehouse stocks at least once per fiscal year to balance its inventory for Balance Sheet purpose.
Why we do physical inventory?
1. To know the correct stock in hand. Due to some inconvenience (like some materials have been stolen or broken) it may happen that the stock reflecting in sap system differs from the actual stock in storage location. Physical inventory is then carried out to synchronize the stock in hand with the stock reflecting in SAP system.
2. In many countries there is a law that Company have to do physical inventory to check the current stock in hand and that stock or assets is taken into consideration in Company’s financial statement.
In SAP, physical inventory can be carried out both for a company’s own stock and for special stock.
Note that the blocked stock returns and the stock in transfer cannot be inventoried. If these stocks are still to be counted in a physical inventory, you must transfer post these stocks to other stocks capable of inclusion in a physical inventory.
The stock in a warehouse can be divided into stock types. In the standard system, a physical inventory can be carried out for the following stock types:
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Unrestricted-use stock in the warehouse
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Quality inspection stock
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Blocked stock
The following physical inventory procedures can be used in SAP system:
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Periodic inventory
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Continuous inventory
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Cycle counting
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Inventory sampling
Periodic inventory: Most of the time companies use this kind of inventory. In most cases, it is done once a year, and this kind of inventory is called annual physical inventory. That means that material stock is counted once a year. Most of the times at the end of the year or after the season ends (in seasonal industries).
In a periodic inventory, all stocks of the company are physically counted on the balance sheet key date. In this case, every material must be counted. During counting, the entire warehouse must be blocked for material movements.
Continuous inventory: All materials are counted at some point in the year, but that can be at any day appointed for. So we can count some material in February, others in April and so on. A single material can be counted on a single date. This type of inventory is mainly utilized in warehouse management based warehouses, but it can be done in inventory management too.
In the continuous inventory procedure, stocks are counted continuously during the entire fiscal year. In this case, it is important to ensure that every material is physically counted at least once during the year. You can use the same transactions for 'continuous inventory' as for 'periodic inventory'. The only difference is that you count a material more than one time per fiscal year.
Cycle counting: This type of inventory allows us to set a period for regular intervals for physical inventory on the material level. So a fast moving and high value material can be counted four times a year while slow moving and low value material can be counted once a year. The indicator for this is set in material master in the Plant/Storage Location 1 View, in the field
Cycle counting is a method of physical inventory where inventory is counted at regular intervals within a fiscal year. These intervals (or cycles) depend on the cycle counting indicator set for the materials.
The Cycle Counting Method of Physical Inventory allows fast-moving items to be counted more frequently than slow-moving items.
CC phys. Inv. Ind. Inventory sampling: Only a number of randomly selected materials are counted on the balance sheet key date, and if those materials show small enough differences, the other materials can also be considered to have a correct stock level. Not really used that often, as it is essentially an approximation, but in some cases it can be used if material and warehouse structure imply that.
In MM Inventory Sampling, randomly selected stocks of the company are physically counted on the balance sheet key date. If the variances between the result of the count and the book inventory balance are small enough, it is presumed that the book inventory balances for the other stocks are correct.
Restrictions
The posting of physical inventory differences is subject to certain time constraints:
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The posting period is automatically set during counting. Therefore, the inventory difference must be posted to the same period or - if postings to the previous period are allowed - in the following period.
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The fiscal year is set by specifying a planned count date when creating a physical inventory document. All subsequent postings to this document must take place in this fiscal year and/or in the first period of the following fiscal year, if postings to the previous period are allowed.
Physical Inventory Process
The process of physical inventory can be divided into three phases:
1. Physical Inventory Preparation
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Create a physical inventory document.
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Blocking Materials for Posting
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Print and distribute the physical inventory document.
2. Physical Inventory Count
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Counting stocks
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Entering the result of the count on the physical inventory document printout
3. Physical Inventory Analysis
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Entering the result of the count into the system
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Initiating a recount, if necessary
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Posting inventory differences
The physical inventory procedure is carried out in three steps:
1. Creating a Physical Inventory Document
2. Entering the Physical Inventory Count
3. Posting inventory differences
You can also group together individual phases and carry them out in a single step, as follows:
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posting the physical inventory count without reference to a physical inventory document
In this step, the following are combined:
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a physical inventory document is created.
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the count is posted.
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posting the physical inventory count and inventory differences
If a physical inventory document exists, the following are combined in this step:
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the count is posted.
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any inventory differences are posted.
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posting the physical inventory count without reference to a physical inventory document
In this step, the following are combined:
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a physical inventory document is created
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the count is posted
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any inventory differences are posted
Physical Inventory Preparation
To ensure that the physical inventory count goes smoothly, you have to carry out a number of steps in preparation.
Process Flow
1.
Create a physical inventory document.
A physical inventory document contains, among other things, the following data:
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the plant and storage location in which the count is to take place
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when the count is to take place
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which materials are to be counted
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for material handled in batches: which batches are to be counted
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in the case of split valuation: which sub-stocks are to be counted
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which stock types are to be counted
2.
Blocking Materials for Posting
Due to the delay between a material movement and the posting of that movement, there is a short-term discrepancy between actual warehouse stock and book inventory. To avoid such a discrepancy during physical inventory, it is recommended that you block the materials for posting during the physical inventory. You can set a posting block two ways:
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You block the relevant materials when you enter the physical inventory document. This is recommended if you create the physical inventory document immediately before the count.
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You block the relevant materials later by changing the posted physical inventory document. This is recommended if you do not create the physical inventory document immediately before the count.
The posting block is automatically cancelled when you post the counting results for the physical inventory document.
3.
Print and distribute the physical inventory document.
You must print out the physical inventory document for the physical inventory count and pass it on to the people responsible for doing the counting.
Physical Inventory Count
During the inventory count, all the materials being inventoried are counted and entered physically.
Process Flow
1. The stocks are counted for individually for the materials in a physical inventory document.
2. The count results are written on the printout of the physical inventory document.
3. The printout is then directed back to the person responsible, so that he or she can enter the count into the system and analyze it.
Physical Inventory Analysis
During the physical inventory analysis,
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enter the count results in the system
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determine whether a recount is necessary if there are any discrepancies
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post the inventory differences.
Process Flow
1.
Entering the count results in the system
After the count has been taken, you must enter the results of the count into the system. You enter the counted stocks for every item of a physical inventory document.
If non-SAP programs are used to carry out the inventory count, you can import the count data into the R/3 System using the following functions:
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Using batch input for entering count results
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Transfer PDC (Portable Data Capture) inventory count data
2.
Initiating a recount
It is possible to initiate recounts for individual items on a physical inventory document. This is recommended if you suspect that an error was made during counting. When you initiate a recount, a new physical inventory document is created.
3.
Posting inventory differences
If the physical inventory is different from the book inventory, you must correct the book inventory balance by posting the differences. This step ends the physical inventory.
Result
When you post the physical inventory difference, the system creates a material document that records the adjusted stock balances and an accounting document that contains the necessary account activities.
Creating Physical Inventory Documents
Use
There are two methods of creating a physical inventory document, as follows:
- Creating Single Documents
In this case, you explicitly specify the materials to be counted. This method is recommended if you want to take inventory of only a few materials.
- Creating Sessions
In this case, you enter the criteria that should determine which materials are to be inventoried in which plants and storage locations. The system then creates a physical inventory document for each plant and storage location with the materials that fulfill the criteria. This method is recommended if you want to take inventory of a lot of materials
Changing Physical Inventory Documents
You can make the following changes to a physical inventory document:
In the document header
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change the planned count date
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set or remove the posting block
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freeze the book inventory balance
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create or change the physical inventory number
In an item still to be counted
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change the stock type
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change the count unit of measure
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set the deletion indicator
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Enter new items, provided no count has taken place
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Delete the document
Please note when deleting:
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If you set the deletion indicator for an item, the item remains in the document but cannot be processed. This will unblock the material.
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If you delete a document, it is physically deleted if there are no inventory difference postings for its items. If a difference has been posted, the document is proof of the posting. Therefore, it is simply flagged for deletion. This means it can then be displayed, but no longer processed. The document is physically deleted when the next reorganization program is run.
Blocking Materials for Posting
There are two ways to block materials for posting for the duration of the physical inventory count:
- Blocking when Creating
- Blocking Later
Blocking when Creating
To block the materials of a physical inventory document when you create the document, do the following:
When creating an individual physical inventory document, select the Posting block field on the initial screen.
When creating a session, select the Posting block field on the selection screen.
Blocking Later
You can block materials later either for an individual physical inventory document or (using sessions) for several physical inventory documents. To do this, proceed as follows:
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individual processing
a. From the inventory screen, select Physical inventory document Change. The initial screen appears.
b. On the initial screen, enter the number of the physical inventory document. Since the posting block is specified in the document header, select GoTo Header from the menu. The header data screen appears.
c. On the header data screen, select the Posting block field.
d. Post the document by selecting Physical inventory document Post from the menu.
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session processing
a. From the Physical Inventory menu, select Sessions Block material. The criterion screen appears.
b. On the criterion screen, enter the number of the physical inventory document (or a range of physical inventory document numbers), and select the Posting block field.
c. Select Program Execute from the menu. The system creates a session. A list appears with all of the physical inventory documents that are to be blocked according to your selection. The system displays a message with the name of the session.
Printing Physical Inventory Documents
To print physical inventory documents, proceed as follows
From the inventory screen, select Document Print. The criterion screen appears. Give SAP Printer and Print
Entering the Physical Inventory Count
After the count has been performed, you must enter the results of the count into the system.
There is also a provision in the R/3 System to enter the result of the count for a material for which no physical inventory document has been created. In this case, a physical inventory document is automatically created upon entry of the result of the count.
Thus, there are two methods for entering a physical inventory count, as follows:
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entering the count with reference to a physical inventory document
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entering the count without reference to a physical inventory document
Furthermore, it is possible to change an already entered physical inventory count.
Freezing the Book Inventory Balance
If you have not completed your inventory count, you can freeze the book inventory balance in the physical inventory document. This is to prevent the book inventory balance, which is relevant for physical inventory, from being changed by any movements. These could otherwise lead to incorrect inventory differences.
From the Physical Inventory menu, you can freeze the book inventory balance using the following functions:
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Physical inventory document Create (initial screen)
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Inventory count Change (Header)
Setting Zero Count
If a quantity of zero was counted for an item, enter this by selecting the ZC (zero count) column.
It is not sufficient to enter 0 in the Quantity in column, because the system interprets a zero as "not yet counted."
Setting Zero Count Automatically
When entering inventory counts with reference to a physical inventory document which contains many items with a stock balance of zero, it is possible to set “zero count” automatically for all items not counted.
Consequently, you only need to enter the quantity counted for inventory items with stock. You no longer need to set the indicator Zero count for every single item with zero stock.
Changing a Physical Inventory Count
To change a physical inventory count, you proceed exactly as you would for entering a physical inventory count, with one difference. On the item screen, the Quantity in column is already filled.
Overtype the entry with the corrected quantity, then post the document.
If you have initiated a recount for an item, you can no longer change the physical inventory count. The quantity determined during recounting can only be entered in the physical inventory document for the recount.
Initiating a Recount
Enter the physical inventory document for which you want to initiate a recount. By specifying a threshold value, you can limit the number of items in the recount to only those which display a larger difference than the threshold value.
A new physical inventory document is created that contains the selected items. The system confirms the posting and displays the number of the physical inventory document.
The recounted items are deactivated in the original document and can no longer be processed via this document.
Posting Inventory Differences
There are various options for posting inventory differences depending on the processing status of the physical inventory transaction.
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Posting differences after the count has been posted
A physical inventory document has already been created, and the count has already been posted. You only have to post the inventory differences.
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Posting the count and inventory differences simultaneously after the physical inventory document has been created
A physical inventory document has been created, but the count has not yet been posted.
The count results are available. You enter the count and post the differences in one step.
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E
ntering the count without a document reference
You have a count result without reference; that is, no physical inventory document has yet been created for this physical inventory transaction. You create a physical inventory document, enter the count, and post the differences in one step.
Posting Differences After the Count Has Been Posted - MI07
Posting the Count and Differences Simultaneously - MI08
Entering the Count Without a Document Reference - MI10
After the inventory differences have been posted successfully, the system issues the message:
Diff. for I-document ----- posted with M-document -----.
When you post the physical inventory difference, the system creates a material document that records the adjusted stock balances and an accounting document that contains the necessary account activities.
Serial Numbers in Physical Inventory
When carrying out a physical inventory for materials that have serial numbers, you can enter the serial numbers while you are entering the results of the physical inventory count.
This is possible for the following transactions/events:
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Entering the physical inventory count (MI04)
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Entering the physical inventory count without reference to a document (MI09)
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Entering the count and posting differences in one step (MI08)
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Creating a physical inventory document, entering the count, and posting differences in one step (MI10)
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Changing the physical inventory count (MI05)
Physical inventory with serial numbers is carried out for all materials that require serial numbers.
Inspection lot comparison (stock type 2) with serial numbers is not supported.
Account Activity During Posting of Inventory Differences
The account activity during posting of the inventory differences depends on which stock was inventoried:
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company’s own stock
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consignment stock from vendor
Inventory Differences in Company’s Own Stock
When you post inventory differences, the material master record is changed, total stock is automatically adjusted to the counted quantity. From the accounting point of view, this corresponds to a goods receipt or goods issue, meaning that when the inventory difference is posted, the stock account is debited or credited:
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If the counted quantity is smaller than the book inventory balance, the stock account is credited with the following value, inventory difference x price. The offsetting entry is made in the "Expense from physical inventory" account.
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If the counted quantity is greater than the book inventory balance, the stock account is debited with the value of the inventory difference x price. The offsetting entry is made to the "Income from physical inventory" account.
Since the amount posted is calculated on the basis of the current standard or moving average price, posting inventory differences does not lead to a price change.
Cycle Counting Method of Physical Inventory
Cycle counting is a method of physical inventory whereby inventory is counted at regular intervals within a fiscal year. These intervals depend on the cycle counting indicator set for the material.
Cycle Counting allows you to count fast-moving items more frequently than slow-moving items, for example.
Mark all materials that are to be included in cycle counting with a cycle counting indicator in the material master record (storage data). The cycle counting indicator is used to group the materials together into various cycle counting categories (for example, A , B , C, and D). In Customizing for Inventory Management, you can define for each category the time intervals at which the materials are to be counted.
You can use the program ABC Cycle Counting Analysis to perform an analysis. In this analysis, the system assigns the materials to the individual categories according to consumption or requirements. You can also specify whether this analysis is to consider only the materials with cycle counting indicator or all materials. The cycle counting indicator in the material master records can be updated automatically by this program.
For the planning of cycle counting, run the program Create physical inventory documents for cycle counting. This program checks all cycle counting materials to determine whether a physical inventory is due to be carried out.
