Why Taking Physical Inventory is Essential for Record Keeping, Accounting, Taxation, Fraud Prevention and Customer Service in Businesses

If using a periodic system, companies take a physical inventory for the following reasons:

1. Determine inventory for Balance Sheet2. Determine Cost of Goods Sold

Companies take a physical inventory for the following reasons when using a periodic system:

1. Record Keeping: Physical inventory provides accurate and measurable records of the inventory on hand. Information on inventory levels is essential for businesses to make informed decisions about their operations and financial position.

2. Accounting Purposes: Inventory records are required for accounting purposes to track inventory levels, monitor shrinkage, and determine the cost of goods sold (COGS).

3. Tax Purposes: Physical inventory enables businesses to determine the value of their inventory on hand for tax purposes. It is necessary for businesses to know the value of their inventory, as it is part of their taxable income.

4. Prevents Losses and Theft: Performing a physical inventory helps businesses identify losses and theft that may have occurred within the warehouse or store. This helps management take measures to prevent future losses and reduce the possibility of theft.

5. Customer Service: Accurate inventory records lead to efficient customer service. Having an accurate inventory ensures that customers are not turned away due to out-of-stock issues, and the business can meet customer demand efficiently.

In summary, taking physical inventory is an essential activity that businesses need to perform periodically for proper recording, accounting, and taxation of inventory levels, fraud prevention, loss control, and efficient customer service.

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