Inventory and Stocktake for a Small Trading Company: Counting, Costing and Year-End Stock

By Di Ma, Project Manager 28 OCT 2026 · 3 MIN READ

For a company that buys and sells goods, stock is usually one of the biggest numbers on the balance sheet, and the one most likely to be wrong. Every unit counted too many adds straight to profit; every damaged box still valued at cost overstates it. Here's how to count it, cost it and book it.

Periodic or perpetual?

Periodic: purchases are recorded as they happen, and the stock figure is updated only when you count, usually at the year end. Cost of goods sold for the year is worked out from the count. Most small trading companies work this way.
Perpetual: every purchase and sale updates the stock records item by item, usually in an inventory system, so stock and cost of sales are known continuously. Counts then check the system rather than set the figure.

Cost of goods sold for the year, periodic method (example)
Item	HK$
Opening stock (last year's count)	150,000
Add: purchases for the year	600,000
Less: closing stock (this year's count)	(170,000)
Cost of goods sold	580,000

A stocktake checklist

Before the count

Pick the date: normally the year end itself, or as close to it as possible.
Prepare count sheets by location, with item codes and units, and number them.
Tidy the stock, separate damaged and obsolete items, and mark goods that aren't yours (held for customers or on consignment).
Tell your auditor. They may want to attend.

On the day

Stop or record movements during the count.
Count in pairs where you can, one counting and one recording; mark each area as counted.
Note the last delivery in and the last despatch out: the cut-off.
List stock held elsewhere, such as a third-party warehouse or goods in transit, and get confirmations.

After the count

Recount large differences, then value the count, and keep the signed count sheets.
Check that goods delivered before the cut-off are in purchases and payables, and goods sold before it are out of stock and in sales.

Cut-off errors move profit between years. A delivery counted in stock but with its bill booked next year inflates this year's profit by the full cost of the goods.

Valuing stock: lower of cost and net realisable value

Under Hong Kong's financial reporting standards, stock is carried at the lower of cost and net realisable value (the expected selling price, less the costs of completing and selling it).

Cost includes the purchase price and the costs of bringing the goods to their present location, such as inbound freight and handling, less trade discounts.
Cost formula: for interchangeable goods, first-in, first-out (FIFO) or weighted average. Last-in, first-out (LIFO) isn't allowed. Use the same formula consistently.

Opening 100 units at HK$50, bought 200 at HK$60, sold 220
Method	Cost of goods sold	Closing stock (80 units)
FIFOfirst in, first out	HK$12,200100 × 50 + 120 × 60	HK$4,80080 × 60
Weighted averageHK$17,000 ÷ 300 = HK$56.67	HK$12,467	HK$4,533

Either method gives the same total over time (HK$17,000 here). It's the split between cost of sales and closing stock that differs, and so the profit in a particular year.

Slow-moving, damaged and obsolete stock

Where goods will sell for less than they cost, or not at all, write them down to net realisable value. Review slow-moving lines at each year end: last year's fashion range, products superseded by a new model, goods past their shelf life. Your auditor will ask how you judged it.

The year-end entry

On the periodic method, the closing stock entry brings the books into line with the count: if stock went up, Dr Inventory / Cr Cost of goods sold; if it went down, the reverse. The count sheets are the document behind the entry.

What the auditor checks

Attendance at the count, or test counts afterwards.
Cost: a sample of items traced to purchase invoices.
Net realisable value: sales after the year end compared with cost.
Cut-off: deliveries and despatches around the year end.

See the year-end checklist and what your auditor will ask for.

How Certanta handles stock

Purchases booked as they arrive, each with its supplier bill, from receipts in any language.
Your count booked as the closing stock entry, with the signed count sheets filed as its document.
Gross margin every month in your income statement and management pack.
Ask about it. "How was cost of goods sold worked out?" is a question for the AI assistant in your portal.

The Certanta client portal for the fictional demo company Harbourfront Trading Ltd. Question to the AI assistant: How much inventory do we hold, and how was cost of goods sold worked out this year? Answer: inventory HKD 168,500, the same as the opening balance, with no inventory movement posted this year; cost of goods sold HKD 2,237,825, the sum of nine monthly supplier bills posted straight to cost of goods sold, with no closing stock adjustment yet, giving a gross profit of HKD 1,532,140. — The periodic method in the demo company's books: purchases go straight to cost of goods sold, and the stock figure waits for the next count.

Frequently asked questions

How should a small company value its stock?

At the lower of cost and net realisable value. Cost includes the purchase price and the costs of bringing goods to their present location, such as inbound freight. Net realisable value is the expected selling price less the costs of completing and selling.

Should I use FIFO or weighted average?

Either is allowed for interchangeable goods under Hong Kong's financial reporting standards; LIFO is not. Choose the one that fits how your stock moves and how your records are kept, and use it consistently.

What is the difference between periodic and perpetual inventory?

On the periodic method, the stock figure is updated only when you count, and cost of goods sold for the year is worked out from opening stock plus purchases less closing stock. On the perpetual method, every purchase and sale updates the stock records continuously.

When should a stocktake be done?

Normally on the year-end date, or as close to it as possible, with movements recorded around the count so that the cut-off is clear.

What happens to damaged or slow-moving stock?

If it will sell for less than it cost, or not at all, it is written down to net realisable value. Review slow-moving lines at each year end.

Does the auditor attend the stocktake?

Often. Where stock is material, the auditor will usually attend the count or perform test counts, and will test cost, net realisable value and the cut-off.

Stock in the books, not just in the warehouse

Certanta books your purchases, files your count sheets with the closing stock entry, and shows your gross margin month by month.

Open the demo See pricing

This article is general information about bookkeeping and financial reporting, not accounting, audit or tax advice for your company. How your stock is valued should be agreed with your accountant or auditor.