Income statement showing the effects of stock error

There are various causes of stock error including the following:

1. Theft: Stealing of items in the store reduces the quantity available in the store and cause the records of the store to differ with the stock records.
2. Unreported product damage: Damaged products may be removed from the store without being reported. This makes the amount shown in the system different from actual items in the store.
3. Human error: This may occur during labelling, counting and recording of the items in the store, as a result, this may cause the records to differ with the actual items available.
4. Misplaced inventory (location error): This occurs when items are received in stock and then placed in the wrong shelf or bin. Customers may also cause this if they pick products and place them in a different location.
5. Mismanagement of returns: When returns are not properly coded and placed in the inventory. This results into inaccurate records of stocks and returns.

To prevent stock error, one should control every step that involves the stock and improve the stock's security.

Below are some ways that can be adopted to minimize the stock error:

1. Improve security: There are various ways to improve security at business premises. One modern way is the installation of surveillance cameras. These can also be supported by the use of mirrors that can be placed in the corners and some less visible areas to help give extra sightlines for easy monitoring of staff from different angles. When thieves find out that they might be caught on camera, they can consider not to steal.
2. Double-check system: The best way to minimize mistakes in stock records is to incorporate a double-check system when receiving inventories. An automated single system can also be installed for data transfer from one system to another.
3. Hiring the best employees: Find employees who are good fit for your firm. Apart from candidate's face to face interview, academic performance and experience, it is better to check the references to make sure they worked well with others in their previous jobs and get evidence of their honesty and dedications.
4. Stock auditing: Make frequent stock auditing processes, like daily stock counting to minimize human error and provide more accurate and up-to-date stock data. For more accurate financial data, the business management can organize audits by category and count stocks by samples on a predictable schedule.
5. Go paperless: Provide the responsible staff with right inventory tools for the stock management process. In modern world, inventory management need paperless transactions for invoices and purchase orders to replace manual inventory documentation, which is subject to human error. Modern software solutions like barcode scanning or RFID technology track items as they move through the warehouse.
6. Conduct regular inspections: The management should make regular inspection to the warehouse at regular intervals so as to ensure things are remaining optimized.

Stock error affects the cost of sales and net profit reported by the company. An error in the value of stock, means error in the value of cost of sales and net income. These errors may cause the cost of sales and net profit to be either overstated or understated. Net profit and closing inventory are also reported in the statement of financial position as part of retained earnings and current assets respectively, this means the statement of financial position is also distorted as a result of a wrong figure of inventory.

Stock Error	Cost of Goods Sold	Gross Profit	Net Profit
Understate ending stock	Overstated	Understated	Understated
Overstate ending stock	Understated	Overstated	Overstated
Understate opening stock	Understated	Overstated	Overstated
Overstate opening stock	Overstated	Understated	Understated

Example

The following is the summary statement of profit or loss of Ndindi Traders for two